When the Federal Reserve slashes its benchmark rate, as it did Nov. 7, stocks in interest-sensitive sectors often see a boost.
Lower rates make borrowing cheaper, driving growth in sectors including real estate, utilities and financials.
Here’s a look at how those industries and others may get a boost as businesses and consumers benefit directly from lower financing costs.
— Real estate stocks.
— Homebuilder stocks.
— Utility stocks.
— Technology stocks.
— Financial stocks.
— Insurance stocks.
— Consumer discretionary stocks.
Real Estate Stocks
It’s fairly intuitive that lower interest rates would benefit real estate stocks, but it may take a while to see mortgage costs trending noticeably lower.
The Real Estate Select Sector SPDR Fund (ticker: XLRE) notched gains after the Fed’s rate cut, although it’s still trading below September highs.
Elevated borrowing costs are unlikely to ease significantly, even with rate cuts, says Michael Wagner, co-founder and chief operating officer at Omnia Family Wealth in Aventura, Florida.
Although reductions in interest rates generally lead to lower mortgage rates, creating more affordable home financing, the market is still grappling with rising long-term rates. For example, the 10-year Treasury bond rate has been trending higher since the first Fed rate cut in mid-September.
“This environment is expected to keep financing difficult and maintain real estate prices at elevated levels,” Wagner says. “As a result, new projects may struggle to launch, and deal-making in commercial real estate could remain limited as high costs and restricted new supply continue to restrict growth.”
Homebuilder Stocks
As a subset of the real estate sector, homebuilders as a whole have remained strong since 2022, when the Fed began raising rates.
The SPDR S&P Homebuilders ETF (XHB) is up 13% on a three-year basis and up 43.6% over the past year, as of Nov. 14.
Lower rates could give the industry a boost, but there are also headwinds.
Mortgage rates rose in October, despite lower interest rates, but there’s optimism that lighter regulations on homebuilding, supported by both political parties, may drive new activity.
The National Association of Homebuilders, an industry trade group, has been lobbying to make housing a top priority on local, state and national levels.
However, this industry presents a case study in mixed signals. On the one hand, construction costs are rising and new trade tariffs would likely increase costs further.
On the other hand, as mortgage rates gradually decrease, which generally takes some time following Fed rate cuts, homebuilders should eventually see increased demand.
Utility Stocks
The utilities sector, typically among the least exciting in a roaring bull market, can thrive when rates decline. That’s because the utilities business is capital intensive and companies often borrow for big projects. Lower rates reduce those costs.
However, institutional investors don’t always pile into utilities after a rate cut. Since the first Fed rate cut, the S&P 500 is up 6%. The Utilities Select Sector SPDR Fund (XLU) lags the broader index with a gain of less than 1%.
One big question mark aside from interest rates affecting utilities: The second administration of President-elect Donald Trump may bring policy changes to the industry. On the one hand, investors typically cheer deregulation; on the other, there’s concern that many current clean energy projects, which have seen heavy investment, may be halted.
Analysts continue to view the sector with optimism. In an October report titled, “2024 Economic & Market Outlook: The Final Stretch,” WisdomTree analysts wrote that Wall Street is pricing in more rate cuts by the fall of 2025.
Although utilities stumbled in the past month, they’re up 23% year to date, outperforming consumer staples, energy, health care and materials.
“If 10-year Treasurys decide to move at all in sympathy with said cuts, we should again review the stock market action that has accompanied the bond bull since around Independence Day,” the WisdomTree analysts wrote. “The groups that are ‘on’ have been utilities, real estate and financials.”
Technology Stocks
Tech is another sector that typically benefits from rate cuts, as lower borrowing costs make it more attractive for companies to pursue high-growth projects. Those lower costs can also boost a company’s bottom line.
In general, lower borrowing costs have less of an impact on cash-rich giants such as Alphabet Inc. (GOOG, GOOGL) and Microsoft Corp. (MSFT), which use debt less frequently than other companies.
So far this year, the tech sector has outperformed the S&P 500. That can be attributed to outsized gains from leaders like Nvidia Corp. (NVDA) and recent S&P 500 addition Palantir Technologies Inc. (PLTR).
In their report, WisdomTree analysts forecast that value sectors would benefit from rate cuts more than growth sectors.
“Value stocks are priced at significant discounts compared to growth, and the Fed cutting cycle may invigorate a broadening-out market rotation beyond mega-cap technology names,” the analysts wrote.
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Financial Stocks
The financial sector encompasses several different business models, such as banking, insurance and asset management.
“We have been overweight financials given attractive valuations relative to the broader market,” says Stefan Karlsson, chief investment officer at Aureus Asset Management in Boston.
Because financials tend to be cyclical, Karlsson says they should continue to benefit from robust U.S. economic activity.
“Firms with private wealth franchises are especially well positioned, as this business is very sticky, high-margin and rewarding when capital assets are appreciating,” he says.
As markets rise, asset managers also earn more. As an example, say a firm charges 50 basis points on a $10 million account. That equates to a fee of $50,000. If the account value rises to $15 million, the manager’s income increases, even if it slashes the client’s fee for any assets above $10 million.
As Karlsson points out, clients tend to be happy when their accounts are rising and stick with their current manager.
He says Charles Schwab Corp. (SCHW), Blackstone Inc. (BX) and Morgan Stanley (MS) are among Aureus’ positions that are benefiting from the positive industry dynamics.
Insurance Stocks
Another area of financials that may benefit from lower rates is the insurance industry.
Lower rates increase demand for insurance as consumers and businesses seek alternatives to lower-yielding investments. In addition, policyholders have more incentive to continue paying premiums, as the number of high-yield opportunities drops.
“In the insurance sector, rate cuts create an interesting dynamic that many investors overlook,” says Yehuda Tropper, CEO and life insurance and life settlement advisor at Beca Life, based in Toms River, New Jersey.
While lower rates typically pressure insurance companies’ investment income, he adds, they can boost areas of the industry such as the life settlement market. That’s connected to the relative paucity of other higher-yielding instruments.
“When rates drop, seniors holding life insurance policies often find more attractive offers for their policies on the secondary market, as investors seek yield alternatives to fixed-income investments,” Tropper says.
He adds that life insurers with strong universal life and annuity products may see increased consumer demand, as people seek guaranteed returns in a lower-rate environment.
Consumer Discretionary Stocks
Traditionally, consumer discretionary stocks have been companies selling non-essential goods and services. The theory is that as consumers tighten their belts, industries such as entertainment, travel and some retail contract.
There’s still some validity to that, and lower rates drive spending as consumers have more disposable income, but the sector itself looks different than it did in the past.
The largest consumer discretionary stocks in terms of market capitalization are Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA), both of which tilt toward technology. Analysts forecast that both companies will grow revenue at double-digit rates in the next several quarters.
The Consumer Discretionary Select Sector SPDR Fund (XLY) is the S&P 500’s second-best-performing sector fund year to date — behind only the Communication Services Select Sector SPDR Fund (XLC) — indicating optimism about rate cuts spurring growth.
In its report, WisdomTree said it expects consumers to continue the robust spending they’ve shown since 2020, after a short pause at the beginning of the pandemic. Lower rates should give that spending a further boost.
“[T]he U.S. consumer has several levers of support if the Fed truly wants to take a couple hundred basis points out of overnight money,” the analysts wrote. “For one, credit card rates will probably decline, as will auto loan rates. They can also get a deal on the car itself, especially because used cars, specifically, are in outright deflation.”
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Update 11/15/24: This story was previously published at an earlier date and has been updated with new information.
