The Federal Reserve, as widely expected, raised interest rates by a quarter-percentage point and signaled the possibility of further increases ahead. This marks the 11th rate increase in more than a year, a streak that has made mortgages and other consumer and business loans increasingly expensive.
The rate hike brings the benchmark interest rate, the federal funds rate, to 5.25-5.50%, the highest level since March 2001. The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and slowed down economic growth.
“Recent indicators suggest that economic activity has been expanding at a moderate pace,” the Fed said in its statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” Inflation in the United States cooled down for the 12th consecutive month in June, with the Consumer Price Index rising 3% year over year — the lowest rate since early 2021. Although inflation has dropped from a peak of 9.1%, it has a long way to go to meet the Federal Reserve’s 2% target.
Sectors to Benefit
Higher interest rates usually indicate a healthy economy, which leads to increased consumer confidence, rising wages and higher spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks.
As such, it will benefit cyclical sectors like financials, industrials and consumer discretionary. A rising interest rate scenario is highly profitable for the financial sector as the steepening yield curve would bolster profits for banks, insurance companies, discount brokerage firms and asset managers.
Industrial sectors tend to benefit as a stronger economy can lead to increased business investment, infrastructure spending and demand for durable goods. These industries tend to perform well during periods of economic expansion. While rising interest rates can have negative implications for consumer spending, certain segments within the consumer discretionary sector can benefit. Companies that offer luxury goods and services, such as high-end retailers, luxury automobile manufacturers, and leisure and entertainment providers, may experience increased demand as the economy strengthens and consumer confidence remains intact.
The materials sector, which includes companies involved in mining, chemicals, and forestry, can also benefit from a stronger economy driven by higher interest rates. As demand for goods and construction materials rises, companies in this sector may experience increased sales and potentially higher profitability.
Further, a healthy economy also leads to increased consumer confidence, rising wages and higher spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks.
Stocks to Bet On
Amid such a backdrop, we have highlighted stocks from these sectors poised to benefit from a rate hike decision. These include Manulife Financial Corp MFC, Carnival Corporation CCL, Caterpillar CAT, PPG Industries Inc. PPG, and Lifetime Brands LCUT. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy), a Value Score of A or B, and have witnessed positive earnings estimate revision for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Manulife Financial is one of the three dominant life insurers within its domestic Canadian market and possesses rapidly growing operations in the United States and several Asian countries. With a market cap of $36.6 billion, the stock has an expected earnings growth rate of 2.9% for this year.
Manulife Financial has a Zacks Rank #2 and a Value Score of A.
Carnival operates as a cruise and vacation company. It is the world’s leading leisure travel firm and carries nearly half of the global cruise guests.
Carnival has an estimated earnings growth of 97% for the fiscal year ending November 2023 and has a market cap of $19.5 billion. The stock has a Zacks Rank #1 and a Value Score of B.
Caterpillar, known for its iconic yellow machines, is the largest global construction and mining equipment manufacturer. With a market cap of $135 billion, Caterpillar has an estimated earnings growth of 29.1% for this year.
The stock has a Zacks Rank #2 and a Value Score of B.
PPG Industries is a global supplier of paints, coatings, chemicals, specialty materials, glass, and fiberglass. It has estimated earnings growth of 23.5% for this year.
PPG Industries has a market cap of $34.6 billion. It carries a Zacks Rank #1 and has a Value Score of B.
Lifetime Brands is a leading designer, marketer and distributor of kitchenware, cutlery & cutting boards, bakeware & cookware, pantryware & spices, tabletop and bath accessories, marketing its products under various trade names, including Farberware, KitchenAid, Pfaltzgraff, Cuisinart, Hoffritz, Sabatier, Nautica, DBK-Daniel Boulud Kitchen, Joseph Abboud Environments, Roshco, Baker’s Advantage, Kamenstein, CasaModa, Kathy Ireland, and USE.
Lifetime Brands has an estimated earnings growth of 93.5% for this year and a market cap of $122.8 million. It has a Zacks Rank #2 and a Value Score of A.
Caterpillar Inc. (CAT): Free Stock Analysis Report
Carnival Corporation (CCL): Free Stock Analysis Report
PPG Industries, Inc. (PPG): Free Stock Analysis Report
Manulife Financial Corp (MFC): Free Stock Analysis Report
Lifetime Brands, Inc. (LCUT): Free Stock Analysis Report
To read this article on Zacks.com click here.
This article originally appeared on Zacks
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
