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Fed Alert: If Rates Come Down, These Are 3 Stocks Are Going to Soar
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The Federal Reserve was unlikely to cut rates next week, but Wall Street anticipates a September reduction. Investors are largely expecting an easing cycle to begin, with more interest rate cuts from the Fed materializing in 2024 and 2025. Stocks recently surged on this anticipation, as investors price in what this will mean for stocks (typically, lower rates are conducive to higher multiples in the equity market). The Fed aims to lower rates to achieve a soft landing, cooling inflation and market speculation without causing major job losses or a recession. We’ll have to see if that actually plays out.
Of course, if the Fed is successful, stocks could rally from here. Anastasia Amoroso of iCapital recently noted stocks typically rise before the first rate cut, consolidate for a few months, then climb again in the absence of a recession. That’s the big question right now – will we see the “r” word materialize or not?
Many investors prefer defensive stocks in this environment, and that view makes sense. However, for those looking to bet on incoming interest rate cuts, here are three interest rate sensitive names that could rally the most if we do indeed get the rate cuts the bond market is pricing in, and we avoid a recession.
Key Points About This Article:
- Interest rate cuts appear poised to hit the market in short order, but the question is which companies may benefit the most from this monetary policy shift.
- Here are three stocks I think are well-positioned to take advantage of the new era of easing monetary policy we could be heading into.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) is a complex choice for interest rate cut plays. While lower borrowing costs could reduce profitability, the bank might benefit from increased business volume. JPMorgan’s stock, recently boosted by a 46.1% earnings surprise in Q2, now trades at 3.8-times sales, up from 3.2-times last year. Analysts project a 17.7% sales increase to $176.1 billion for fiscal 2024, making the stock appealing to those optimistic about economic conditions.
As a mega bank, JPMorgan’s revenue streams are relatively well diversified. The company should see a big boost from net interest margins as the yield curve continues to un-invert. Capital markets activity (new IPOs) should also heat up. But the big question is whether these rate cuts will be for the right reasons – if we are headed into a recession, reduced consumer spending and debt issuance could be a net negative for banks. Again, we’ll have to see.
That said, for investors seeking financials exposure, JPMorgan remains the gold standard in this space. In my view, those seeking exposure to a top financial institution should certainly consider JPM stock as the top option right now.
Shopify (SHOP)
Shopify (NYSE:SHOP) is among the top pure-play e-commerce stocks in the market. The company provides a platform that allows merchants to set up online businesses. Shopify’s platform is aimed at small and medium sized businesses, but its market share has grown among large cap names as well.
Now, Shopify’s stock price has bene and underperformed of late. SHOP stock has dropped nearly 20% year-to-date, but risen 79% over five years. Investors saw very strong performance from SHOP stock until late 2021 when the stock has faced challenges, with only 30 of 51 analysts rating it a “buy.”
The current consensus target price on SHOP stock is $76.20, with CIBC’s Todd Coupland recently setting a higher $85 target. Following a positive Q1 2024 report, Shopify’s President praised the company’s strong performance and future growth.
The market anticipates Shopify will show a year-over-year earnings increase with higher revenues for Q2 2024. The stock’s movement will hinge on whether actual results meet or exceed these expectations. Management’s discussion on business conditions will be key to understanding the impact on future earnings and stock performance.
Super Micro Computer (SMCI)
Super Micro Computer (NASDAQ:SMCI) has faced market volatility, dropping 40% from its March peak of $1,188. Despite a recent decline to less than $500 per share, the company’s strategic expansions and strong financials suggest future growth. Indeed, this is a top growth stock that could be a buying opportunity for investors who may have felt they missed out on the previous rally. Broader market concerns, such as potential U.S. export restrictions to China and geopolitical tensions with Taiwan, have impacted major chip stocks, and Super Micro is no different.
Super Micro is boosting its manufacturing by adding three new facilities to meet rising demand for AI and direct liquid-cooling solutions. The company’s liquid-cooled data centers are expected to grow from under 1% to 30% of installations in two years. Over this period, Super Micro expects to capture significant market share. Strategic partnerships with Nvidia and AMD enhance Super Micro’s competitive position in the server and storage market, allowing faster delivery of advanced technology.
Deciding whether to buy Super Micro before its Q2 earnings report may be a tough call. But it’s my view that long-term investors may want to focus on SMCI’s valuation rather than waiting for when it will dip. Currently, SMCI stock is trading at only 14-times forward earnings, making it a great buy with strong growth potential. Whether purchased now or post-report, it is likely to be a worthwhile long-term investment in my view.
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