Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Just as the interest rate hiking cycle had a suppressive effect on the economy to curb inflation, the upcoming interest rate cuts are viewed as relieving the pressure. Scheduled for 17-18 September, the FOMC meeting should deliver the first rate cut since 2020.
With borrowing costs reduced, this should boost consumer confidence and more business investing. In anticipation of the cutting cycle, Brent oil futures (for November) are up $1.33 or 1.86% at press time. For September, FedWatch tool suggests a 50 bps cut with 61% probability, lowering the interest rate from present 5.00% – 5. 25% to 4.75% – 5.00% range.
At the same time, the market could suffer a bearish brunt. Not only do rate cuts have a long lag, but this interim period creates the perception of economic weakness. Moreover, because lower interest rates reduce the return on US investments, holding USD becomes less attractive, which could depreciate the currency.
In that scenario, foreign investors could exert a selling pressure by selling US equities to avoid foreign exchange (FX) losses. This has the potential of a negative feedback loop that erodes investor confidence, which in turn instigates more selling.
But with these factors in mind, following a market correction, which stocks could benefit from an alleviated interest rate regime?
Tesla (NASDAQ: TSLA)
In October 2023’s earnings call, Elon Musk made it clear that a high interest rate regime is a great threat to Tesla’s bottom line.
“I just can’t emphasize it enough that for the vast majority of people, buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.”
Ahead of the presidential elections in November, Tesla is becoming an even more interesting investing proposition outside of ending the high interest rate regime. In the case of former President Trump’s second term, it is likely that his administration will be hostile to DEI policies, as Trump made it clear that “We will terminate every Diversity, Equity, and Inclusion program across the entire federal government.”
Tesla already dropped DEI language from its filing report in January 2024, despite elevated scrutiny from multiple federal agencies, including DoJ, SEC, NLRB and NHTSA. Even more importantly, Trump favors exceedingly high tariffs against China.
This is critical for Tesla’s viability, as Chinese EV companies have sufficiently scaled up their operations to offer competitive EVs. For instance, BYD’s cheapest offering is the Seagull model at around $13k vs Tesla’s upcoming Model 2 that shouldn’t go under $25k.
Even if the upcoming October Robotaxi event goes sour, these factors will likely drive TSLA stock up if Trump’s 2nd turn materializes. In the meantime, Tesla holds $30.7 billion in cash and cash equivalents ending June against total liabilities worth $45.5 billion, of which current liabilities constitute $27.7 billion.
In the last three months, TSLA stock went up 29%, priced at $229.83 against the 52-week average of $209.04. This is still significantly under the 52-week high of $273.93 per share.
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Charles Schwab (NASDAQ: SCHW)
After the initial realignment as the economy shifts from a high to low interest rate regime, stock market investing is likely to make a comeback in a big way. Whether the market rally is immediate or delayed, Charles Schwab has an edge over Robinhood by providing thousands of no-transaction-fee mutual funds.
In the latest August activity, Schwab reported a 4% increase in new brokerage accounts compared to year-ago. Schwab’s total client’s assets increased to $9.74 trillion, up 20% year-over-year.
In July 2024, SCHW stock dropped by nearly 5% following Q2 earnings. Although Schwab’s trading revenues were up 1% to $4.69 billion, this was offset by a 6% drop in net interest income, falling short of expectations. Nonetheless, the company has a record net core base with which to work.
On Jim Cramer’s show, CEO Walt Bettinger also insisted that the company’s cash sorting issues are not related to a repeat of the regional banking crisis.
“The circumstance with our stock decline in the last few days has nothing to do whatsoever with the regional banking-related issues of a year plus ago,”
In the last three months, SCHW stock is down 13% to $63.74 against the 52-week average of $65.48 per share. With Nasdaq’s bottom forecast of $64, this makes it a solid entry opportunity. The average SCHW price target is $75 while the ceiling twelve months ahead is $90 per SCHW share.
Textron Inc. (NASDAQ: TXT)
Mentioned in September’s lineup of space stocks, Textron is one of the infrastructural layers of the aerospace and defense industry. As lower interest rates spur more favorable loans for aircraft purchases, Textron would benefit. In particular for civilian Beechcraft and Cessna aircraft as mid-sized solutions for larger companies.
With Boeing’s reputation eroded, Textron is likely to even gain more government contracts. For instance, in March 2024, subsidiary Bell Textron gained a $455 million contract for 12 AH-1Z helicopters for Nigeria.
Furthermore, Textron employs a wide range of DEI initiatives. This burden could be eliminated with former President Trump’s 2nd term to operate more efficiently. In Q2 2024 earnings, the company reported $3.5 billion revenue, of which $25 million went to interest expenses.
In the quarter, Textron generated $247 million net income vs $275 million in the year-ago quarter, leaving the company with $1.4 billion cash holdings vs $1.75 billion in the same period last year.
Currently priced at $88.28 per share, TXT stock is just above its 52-week average of $85. The present TXT price aligns with the low estimate of $87 while the average TXT price target is $102.11 per share. The ceiling for TXT stock is $115 based on 15 analyst inputs.
Do you think recession, as officially stated, will be completely avoided? Let us know in the comments below.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.
The post 3 Stocks Poised to Thrive Amid Falling Interest Rates appeared first on Tokenist.
