After a period of elevated borrowing costs, the Federal Reserve switched gears in September 2024, cutting interest rates for the first time since 2020. Following a 0.25-percentage-point interest rate cut this September, the Fed is widely expected to make another quarter-point cut at the end of its two-day policy meeting on Oct. 29. Many experts predict another, similar cut before the year’s out.
As of Oct. 28, the opening day of the Federal Open Market Committee meeting, the CME FedWatch tool shows interest rate traders have priced in a 97% probability that the central bank will lower the benchmark rate by 25 basis points. Rate traders also see an 88% chance of another quarter-point cut by the Dec. 10 meeting, which would take the benchmark range from the current 4% to 4.25% down to 3.5% to 3.75%.
Lower rates can reduce financing costs for companies, boost the present value of future earnings, and encourage more consumer and business spending. Julia Hermann, global market strategist for New York Life Investments, says that “the Fed is more poised to provide an interest rate cut than a hike for the foreseeable future. And because the U.S. economy is not in recession, the pairing of gradually easier policy and a resilient economic backdrop make for a constructive equity environment.”
Not all sectors respond to Fed accommodations the same way, though. Here are seven types of stocks that tend to benefit when rates come down:
— Real estate.
— Homebuilders.
— Utilities.
— Technology.
— Financials and insurers.
— Consumer discretionary.
— Industrials.
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Real Estate
Real estate investment trusts, or REITs, and property developers are often first in line to benefit from cheaper borrowing costs. Lower mortgage rates can also spur demand for housing and commercial space. Michelle Cluver, head of model portfolio solutions at Global X, comments, “Real estate relies on external financing in addition to property valuation models being impacted by interest rates. A reduction in interest rates is likely to provide a boost to margins as well as support property valuations.”
The iShares Global REIT ETF (ticker: REET), which tracks the roughly 326 holdings of the FTSE EPRA Nareit Global REITs Index, was up 10.9% year to date through the Oct. 27 market close. Global X SuperDividend REIT ETF (SRET) tracks the highest-yielding REITs in the world, and was up 16.7% in the same period, according to Morningstar.
Homebuilders
When mortgages become more affordable, home sales typically rise, helping builders and related industries such as construction materials, home improvement and appliances.
The SPDR S&P Homebuilders ETF (XHB) currently holds 35 companies within the S&P Homebuilders Select Industry Index, and was down 5.3% year to date through the end of June, but has rebounded to +5% as of Oct. 27. The Invesco Building & Construction ETF (PKB), which incorporates a broad range of companies related to the building and construction industries, is up 30.4% in the same period.
Utilities
Lower interest costs can strengthen utility companies’ balance sheets and may improve dividends as well. Cluver says, “Utilities are capital intensive with high debt burdens. A reduction in interest rates is likely to benefit margins.” Still, Cluver cautions, “Energy and materials both have high economic growth sensitivity and low interest rate sensitivity. As such, should economic growth concerns prompt a rapid reduction in yields, these sectors may struggle.”
The First Trust Utilities AlphaDEX ETF (FXU) currently holds 40 utilities companies, and was up 26.5% year to date as of the Oct. 27 market close. Fidelity MSCI Utilities ETF (FUTY) mirrors the MSCI USA IMI Utilities 25/50 Index, and it was up 24.1% in the same period.
Technology
Tech companies, especially growth-oriented firms, depend on investment in research and expansion. If borrowing costs decline, these companies may find it easier to fund important projects. Valuations can sometimes also get a lift, since future cash flows are discounted at lower rates.
Hermann comments, “Our favorite structural growth story is digital infrastructure, which can span asset classes, and within U.S. equities can provide a medium-term tailwind to technology, communications, utilities, materials and energy, as we see the pace of physical investment backing the artificial intelligence theme happening in real time.”
The Vanguard Information Technology ETF (VGT) and Technology Select Sector SPDR ETF (XLK) offer broad coverage of the technology sector, and were up 27.2% and 29.2% year to date, respectively, as of Oct. 27.
Financials and Insurers
Banks and insurers may see mixed effects, but rate cuts can stimulate lending activity, credit demand and insurance product sales. For certain firms, that can outweigh margin compression.
By late October, Fidelity MSCI Financials ETF (FNCL) and Davis Select Financial ETF (DFNL) were up 11.3% and 17.7% year to date, respectively.
Consumer Discretionary
Lower rates often translate into more confident consumers. Big-ticket purchases (cars, furniture, vacations) become easier to finance, giving retailers and service providers a potential tailwind.
Both Vanguard Consumer Discretionary ETF (VCR) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) offer investors broad access to the consumer-discretionary space, and are up 6.8% and 6.7% year to date, respectively, as of Oct. 27. Both funds have 10-year annualized total returns nearing 14%.
Industrials
Manufacturers and transportation companies can benefit from both lower borrowing costs and stronger economic activity spurred by easier credit conditions.
Fidelity MSCI Industrials ETF (FIDU) and Invesco S&P 500 Equal Weight Industrials ETF (RSPN) provide investors with broad coverage of the industrials space and are up 19.8% and 13.2% year to date, respectively, as of Oct. 27.
The Bigger Picture
Rate cuts don’t guarantee investment gains, and much depends on why the Fed decides to ease. “If they are cutting because the economy is weak, then rate cuts could signal a clear negative for equities. So, perhaps the biggest mistake is assuming all rate cuts will land positively on stocks,” says Dave Grecsek, managing director in investment strategy and research at Aspiriant. Cluver of Global X adds, “Investors should have a view on the direction of Fed policy, as this helps inform a critical part of the macro backdrop; however, they don’t need to reassess their positioning based on every Fed comment. Strong structural tailwinds with favorable macro positioning is a really strong combination.”
In general, cheaper credit typically supports economic growth, lending and business investment, all of which can be favorable for equities in these sectors.
Still, while Fed rate cuts can be helpful, they’re not a magic formula. What matters most is how portfolios are positioned for the long haul. By staying diversified and focused on long-term goals rather than short-term headlines, investors can benefit when opportunities arise without being thrown off course when the Fed shifts its policy.
More from U.S. News
How to Invest When Interest Rates Are Cut
What to Invest In When Interest Rates Peak
How to Invest During Rate Cuts
7 Types of Stocks to Buy if Interest Rates Decline originally appeared on usnews.com
Update 10/28/25: This story was published at an earlier date and has been updated with new information.
