Interest Rates Are Heading Down — These 3 Stocks Win Big When They Do

It’s certainly one of the more interesting times to be an investor right now. After a pandemic-led recession, the economy has roared back (thanks in part to rock-bottom interest rates following that calamity). However, following a surge in inflation in 2022, Federal Reserve interest rate hikes have thrown a monkey wrench into the investing calculus for many long-term investors. 

In my view, interest rates are more likely than not going to head lower over the course of 2026 and into 2027. I’m not saying we’re due for a pandemic-like selloff, but I do think that weakness in the labor market is likely more protracted than the government data suggest. As such, I do think the makeup of the Federal Reserve, and which way many of its presidents and voting members lean (toward providing support for the labor market over battling inflation) could lead to much faster rate cuts than many think.

In such an environment, these are the three stocks I think investors should consider buying before this trend takes full form. 

Realty Income (O)

One of my favorite stocks (in terms of monthly dividend payers) is Realty Income (NYSE:O). This Real Estate Investment Trust (REIT) is among the largest net‑lease REITs, owning thousands of single‑tenant commercial properties under long‑term leases. 

Indeed, in a falling interest rate environment, investing in REITs like Reality Income can provide investors with the sort of long-duration they’re looking for to take advantage of lower interest rates. Given how real estate as an asset class is valued (and mortgage/interest rates matter a great deal on this front), investing in REITs that can show material net operating income increases over the long-term can provide outsized upside, as the yields these vehicles provide far outstrip those provided in the fixed income world.

For Realty Income specifically, the company’s operating margins tend to remain robust given the capital‑light lease structure. Thus, the crux of the bullish argument is improving interest coverage as debt is refinanced at cheaper rates, and incremental acquisitions underwritten at higher equity valuations. On the valuation front, Realty Income is no longer a cheap stock, with a forward price-earnings ratio in the 30s. But with a yield of nearly 5%, this is a stock I remain bullish on as a way to play what I think will be declining rates for the rest of this year. 

Duke Energy (DUK)

Another top defensive stock for investors looking for broad exposure to the utilities sector, Duke Energy (NYSE:DUK) | DUK Price Prediction looks like another interest rate-sensitive stock worth buying right now. 

Indeed, with an ultra-stable cash flow growth profile driven by mostly regulated utilities revenues and earnings, Duke’s ability to not only provide consistent dividend income (but also grow its dividend materially over the long-term) positions this company well to provide fixed income-like yield with both payout and capital appreciation upside. That’s a total return growth profile I personally find attractive, and one investors in the market appear to be gravitating toward now. 

The company’s margins are generally stable, but interest expense as a percentage of operating income is the swing factor that improves as the Fed eases. My bullish angle rests on three core concepts which are: 1. a visible rate‑base growth that underpins mid‑single‑digit EPS growth; 2. a secure dividend that yields comfortably more than Treasuries; and 3. a valuation that can re‑rate from a compressed multiples as income investors rotate out of bonds and back into high‑quality, defensive yield.

D.R. Horton (DHI)

Okay, in terms of interest rate-sensitive sectors that could benefit from a decline in yields across the Treasury curve, homebuilders deserve a look. Within this sector, D.R. Horton (NYSE:DHI) is worth considering. 

That’s partly due to the fact that D.R. Horton is the largest homebuilder in the U.S., focused on entry‑level and move‑up single‑family homes in fast‑growing Sun Belt and suburban markets. While these markets have come under pressure, and D.R. Horton and its peers have had to provide increased incentives to get these homes sold, the reality is that new homes are now more affordable on a relative basis than existing homes. That’s a phenomenon that’s not typical, but one that benefits this company in the medium-term.

Given the aforementioned interest rate sensitivity of housing-related stocks, DHI stock looks well positioned to benefit from a declining rate environment. On that note, fundamentals have been improving, with unit closings, net orders growth, cancellation rates, and other key factors seeing stabilization in recent quarters. If operating margins can expand over the medium-term (and I think they could, if interest rates decline), this is an undervalued stock to consider on pullbacks moving forward.