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Prediction: This stock will be one of the biggest winners of the Fed’s rate cut

Lower interest rates can leave businesses and individuals with more money to spend and invest…

Stocks have rallied this year, buoyed by excitement over the potential of artificial intelligence (AI) – tech stocks have climbed higher, helping S&P 500 announced a 20% gain so far. But one major issue has weighed on market sentiment, and that is the high interest rate environment. The Federal Reserve has raised rates over the past two years to tame runaway inflation. The efforts worked, but they left consumers and businesses with higher borrowing costs, which hurt their ability to spend, which in turn hurt companies’ ability to expand.

Last month, however, the Fed made a key move to turn things around. The central bank cut interest rates for the first time in four years, following a deeper-than-expected cut — 50 basis points instead of 25 — and hinted it would cut rates by another half a point by the end of the year.

This is positive news for those affected by higher rates — consumers and businesses, as we mentioned — because it puts them on a path to lower spending. Of course, it will take time for this to happen and will likely require further rate cuts to bring costs down significantly. But the good news is that things are moving in the right direction, and this should lead to brighter days for most growing companies. And my prediction is that one stock in particular will be one of the biggest winners of the Fed’s rate cut.

A person in a living room is holding a credit card and looking at a phone.

Image source: Getty Images.

A player serving consumers and businesses

This player serves both consumers and businesses, relying on the spending power of both, and is a giant in the high-growth businesses of e-commerce and cloud computing. The stock I’m talking about is Amazon (AMZN -0.64%).

The trillion-dollar company was hit by higher interest rates in two ways: Many of Amazon’s e-commerce customers saw their purchasing power drop, and that meant they had less to spend on non-essential items. And some customers of the company’s cloud computing business, Amazon Web Services (AWS), may have cut spending on projects as borrowing costs rose. This is especially the case for younger growth companies that rely on taking on debt to expand.

This market giant also suffered from the problem that higher rates came to address: rising inflation. In fact, these higher prices weighed on Amazon so much that in 2022 it reported its first net loss in about a decade.

Now, however, with prices under control — thanks to rising rates — and tariffs falling, Amazon’s earnings and stock performance could benefit greatly. It is important to note that during the period of rising inflation, Amazon implemented major changes in its cost structure, efforts that helped the company quickly return to profitability.

For example, Amazon has worked on efficiency across its fulfillment network, and in the US it has moved from a national to a regional model — to reduce delivery time and cost. These and other efforts have worked. Last year, Amazon reported net income of more than $30 billion, and revenue rose 12 percent to more than $574 billion.

A lower interest rate environment

And cost structure measures should help Amazon maximize profitability in better market times. This brings me to today and the coming months, in a context of lower interest rates. Amazon should benefit as it is the leader in e-commerce and as consumers have more to spend, they are likely to turn to Amazon not only for essentials but also for other items they have been hesitant to buy on a tight budget .

The same goes for AWS customers. Those who have held off on launching new projects may make the move as interest rates fall — and that should result in increased sales for AWS. Currently, the business has gained momentum, recently reaching an annual revenue rate of $105 billion.

So my prediction is that Amazon — a company that has suffered from both rising prices and higher interest rates — could be one of the biggest winners in a new, lower-interest environment. As I said earlier, this won’t happen overnight, as it takes time for interest rate changes to trickle down to overall borrowing costs, and further rate cuts are needed to make a big difference. But there’s reason to be optimistic about Amazon’s earnings growth and stock performance over the long term, and that’s great news for Amazon shareholders today.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.

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