Prediction: These 3 stocks emerge after the Fed cuts rates

Most economists now expect the US Federal Reserve to cut interest rates by 25 basis points in each of its three remaining meetings in 2024. In fact, betting markets have fluctuated between expectations for cuts of 75 bps and 100 basis points (implying a discount of 50 basis points). move), depending on how future data unfolds and whether that data supports the case that deeper rate cuts are needed to provide the soft landing everyone is after.

I’m currently in the 100bps camp, although I’m fully aware that the markets have been wrong about rate cut expectations for most of this year (earlier in the year, 150 bps of cuts were initially valued at the market, which was grossly incorrect).

But if the Fed cuts rates as expected, investors may start thinking about how to reposition their portfolios to best take advantage of these trends. Here are three stocks that I think offer some of the best upside for future rate cuts, should they materialize.

Key points about this article:

• Betting markets are increasingly pricing in the likelihood of 100 basis point cuts this year, which would imply a 50bp move before the end of the year.
• If the Federal Reserve cuts rates as expected, here are three stocks that could get downright crazy, especially if the cuts are deeper than expected.
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JPMorgan Chase (JPM)

The logo of JPMorgan Chase & Co. on the side of one of the company’s buildings

JPMorgan Chase (NYSE:JPM) excelled in the first half of 2024, posting a robust second quarter with 20% revenue growth and EPS numbers that easily beat analysts’ expectations. The company saw investment banking fees rise 46%, a key factor many questioned in the report. Unlike many of its peers, JPMorgan also saw strong growth in net interest income and a very impressive 23% return on equity, propelling its stock to a new all-time high .

JPMorgan’s net interest income differential could get a big boost from a steepening of the yield curve. And as one of the largest US banks, JPM stock’s status as among the most defensive in the sector could continue to attract capital to the megabank. If there is any kind of significant volatility in the regional banking space, JPMorgan has proven to be a willing buyer of assets. As a result, this megacap financial stock is largely seen as the top dog in this space, and one that could simply get bigger over time given the way the industry is structured.

Additionally, if interest rate cuts improve economic stability, JPMorgan will benefit significantly. This is a financial institution that is widely diversified in terms of its revenue streams. But given its size, broader economic trends matter. So if the Fed does indeed pull off the soft landing everyone is hoping for, JPMorgan investors could be laughing all the way to the bank with this stock trading at just 12 times earnings.

Dr. Horton (DHI)

A single family housing development that is still under construction

Dr. Horton (NYSE:DHI) is among the largest U.S. homebuilders, consolidating this fragmented space through acquisitions over the years. Indeed, many investors see this company as more than a bet on housing trends. This is a bet on a company with a strong track record of delivering shareholder value, with DHI stock among the market’s most consistent double-digit appreciaters (with dips along the way, of course).

This market-beating performance could be accelerated if interest rate cuts come to pass. As most investors are well aware, interest rates significantly influence mortgage rates and the demand for new homes. With most Millennial buyers out of major markets (given where prices and mortgage rates are right now), any kind of relief could trigger a wave of pent-up demand from households that have outgrown their condos and apartments.

We’ll have to see exactly how hard interest rates fall and how those cuts affect mortgage rates. It is worth noting that this year’s interest rate cuts are mostly applied to the bond market, which is moving towards the mortgage market. As a result, deeper-than-expected cuts will likely be needed for DHI stock to really catch fire from here (it’s been a top-performing stock this year on rate cut speculation alone).

But if you’re in the camp where interest rates could fall faster than expected, this could be a great stock to consider right now.

SoFi Technologies (SOFI)

SoFi Technologies logo

In Q2 2024, SoFi technologies (NASDAQ:SOFI) saw a 41% increase in new members, adding to the thesis that this fintech company could be an undervalued pick at current levels. The company’s main focus is on student loan refinancing business, which picked up following the resumption of mandatory payments last year. However, with interest rates rising, many student loan holders may have locked in interest rates lower than the refinancing rate, leading to a slowdown in short-term lending for SoFi.

Consequently, as the Federal Reserve lowers its overnight rates and rates across the curve decline, SoFi’s ability to pass on these lower rates to student loan borrowers could strengthen its balance sheet in a significant way.

Outside of the company’s core business of student loans, SoFi saw strong growth in its other products, with 40% of products sold last quarter coming from new members, and 30% of those members signing up for a product secondary in the first trimester. month.

SoFi’s ability to capture market share in personal loans, auto loans and other market segments could support even faster growth over time. In my view, SoFi remains an interest-sensitive stock that investors may want to consider ahead of Fed rate cuts.

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