Fed cuts interest rates: Here are the best stocks to buy right now

The wait is over. Investors had been anticipating an interest rate cut by the Federal Reserve for months. Last week, the Fed ended speculation with an exclamation point. It dropped the federal funds rate (the interest rates banks charge each other) by 0.5% — twice the level expected by many economists.

This is not the end of the story. The Fed expects more rate cuts this year and into 2025, with the federal funds rate expected to fall to 3.4 percent by the end of next year.

Investors understandably celebrated the Fed’s move. But what is the best stock to buy now?

Many strong competitors

The great news for investors is that there are many strong contenders for the best stocks to buy with the Fed cutting interest rates. Lower rates help almost every company. However, some sectors benefit more than others.

For example, real estate investment trusts (REITs) are particularly sensitive to interest rates because they borrow heavily to buy additional properties. I’m a fan of two REIT stocks in particular: Real estate income and National Storage Affiliates.

Consumer discretionary stocks, such as those of automakers, can also work quite well in lower rate environments. I expect lower rates to increase wealth Honda enginewhich is very cheap, with shares trading at just 6.3 times forward earnings.

Utility stocks should also benefit from lower interest rates. Like REITs, utilities often rely on debt to finance their growth. There are a lot of great utility stocks on the market. However, I am mostly partial Dominion Energy due to its growth opportunity with data centers in Northern Virginia.

A stock rising to the top

The residential construction industry should be another big winner with rate cuts. Thanks to the Federal Reserve’s recent move, mortgage rates have fallen to their lowest level since early 2023. With more rate cuts on the way, I expect them to continue to fall.

I like more residential construction stocks in the current environment. For example, Dr. Hortonthe nation’s largest homebuilder, is an excellent choice. However, in my opinion, one stock from this group rises to the top: Lennar (LEN -5.33%).

Lennar is among the largest homebuilders in the US. It also develops multifamily rental properties. Its financial services segment provides closing services, mortgage financing and title services, primarily to buyers of company-built homes.

Shares are up nearly 30% this year after rising 64% in 2023. Despite these impressive gains, Lennar’s valuation remains very attractive, with shares trading at just 11.5 times forward earnings. This multiple is lower than DR Horton’s and DVRanother large publicly traded homebuilder.

At the end of the second quarter of 2024, Lennar had an inventory of 16,944 homes with a total value of $7.7 billion. The company’s balance sheet is solid, with a housing construction debt-to-equity ratio of 7.6%.

Beyond tariff reductions

Stuart Miller, executive chairman and co-CEO of Lennar, said in the company’s Q2 earnings press release: “We fully expect an even stronger and broader demand cycle as rates decline . Lower rates and controlled inflation likely will. it builds confidence.”

I guess Miller is right. However, I think there’s an even better reason to buy Lennar stock than the Fed’s rate cuts.

The US continues to suffer from a severe housing shortage. Estimates vary as to how severe this shortage is. Moody’s puts the number at about 1.7 million homes. Fannie Mae and Zillow put the total at 4.4 million and 4.5 million, respectively. Whatever the actual number, the ongoing housing shortage presents a tremendous tailwind for Lennar.

It’s a big problem, but big problems create big opportunities. I see Lennar as one of the leaders in addressing the chronic housing shortage in the US and a great stock to buy right now for long-term investors.