The Federal Reserve, after maintaining high interest rates for several years to curb inflation, announced a shift in strategy on Wednesday by reducing the federal funds rate by 50 basis points. This adjustment lowers the rate to a range of 4.75% to 5%. Despite initial positive reactions, major stock market indexes relinquished their gains by the close of the trading session.
The reduction in interest rates is expected to benefit several stocks. Below is an analysis of three companies poised to capitalize on the new economic environment.
1. Home Depot
A significant outcome of lowered interest rates is the decrease in mortgage rates and overall borrowing costs for homeowners. This reduction is likely to rejuvenate the housing market, fostering refinancing and borrowing through home equity loans and lines of credit (HELOCs). There is already evidence suggesting a surge in demand for HELOCs as rates decline. Homeowners currently have more equity available due to the high mortgage rates locked in over the past few years.
Home Depot, the largest home improvement retailer in the U.S., stands to gain from this shift. The company faced challenges post-pandemic as the home improvement boom waned and mortgage rates increased. As a cyclical business, Home Depot is likely to see a boost in home improvement spending with lowered rates. Recently, the acquisition of SRS Distribution has expanded Home Depot’s reach in the building materials distribution sector, particularly benefiting professional contractors and tradespeople.
Although Home Depot reported a 3.3% decline in comparable sales in the second quarter, the continued decrease in rates could significantly improve the company’s performance and stock by the next home improvement season.
2. Carnival Corp.
Carnival Corp., the world’s largest cruise line operator, is well-positioned to leverage lower interest rates. The company will benefit primarily through the reduction of interest payments on its substantial debt and potential refinancing of its fixed-rate debt. Carnival, which accumulated significant debt to withstand the pandemic, reported $29.3 billion in debt at the end of the second quarter, incurring $450 million in quarterly interest expenses. A reduction in the average interest rate by even 1 percentage point could save the company $180 million annually.
Lower interest rates also stimulate the broader economy and consumer spending, aiding companies like Carnival that operate in cyclical industries. An improved economy means higher consumer expenditure on discretionary activities such as travel, boosting Carnival’s business.
3. Upstart
Upstart, a consumer lending platform, is another company likely to benefit from falling interest rates. The company’s operations are highly sensitive to changes in interest rates. In 2021, the company experienced significant revenue growth and profit margins, driven by stimulus funds and the pandemic economy, but these gains reversed as interest rates increased and credit standards tightened.
With the current reduction in rates, Upstart is expected to see increased demand for its loans and eased lending standards. The company’s recent loan originations are projected to yield 14% gross returns, and Upstart’s improvements have been notable: 91% of loans are now instantly approved and fully automated, and its HELOC product has expanded to 30 states and the District of Columbia.
While the impact of rate cuts was not included in Upstart’s latest guidance, CFO Sanjay Datta expressed optimism, noting that lower rates would unequivocally benefit the business, countering the high rates which had previously hampered it. Datta also indicated that conversion rates would rise with each rate cut from the Federal Reserve, though the precise effects might take a few quarters to manifest in financial results. If Upstart demonstrates a performance reminiscent of its 2021 success, its stock could see significant gains.
This analysis underscores the potential positive impacts of the Federal Reserve’s rate reduction on Home Depot, Carnival Corp., and Upstart, reflecting their readiness to benefit from the current economic adjustments.
