Best Stocks to Buy If the Fed Cuts Rates

The Federal Open Market Committee (FOMC) left interest rates unchanged during its July meeting, but Federal Reserve Chairman Jerome Powell hinted at his press conference that a rate cut was under consideration in September.

The latest data pointing to an economic slowdown has further fueled expectations that the central bank will start cutting interest rates sooner rather than later.

Indeed, according to CME Group’s FedWatch tool, futures traders are pricing in a 47% chance of Federal Reserve will cut interest rates by a quarter of a percentage point at its next meeting in late September – and there is a 54% probability that it will cut the federal funds rate by 50 basis points (0.50%).

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The cuts are expected to continue at future Federal Reserve meetings until the federal funds rate reaches its 2026 median target of 3.1%, as set by the central bank. Economic Forecast Summaryor “scatter plot.”

Of course, these are not binding forecasts, but they indicate that the FOMC outlook favors lower interest rates in the very near future.

So how should investors prepare for lower interest rates and potential additional rate cuts from the Federal Reserve in the coming months?

The following five stocks are good options for investors because they are generally benefiting from lower interest rates. What’s more, each is showing particular strength in trading right now.

AbbVie

Outside the AbbVie building in Illinois

(Photo credit: Jamie Kelter Davis/Bloomberg via Getty Images)

Sector: Healthcare
Market value: $335.0 billion
Dividend yield: 3.3%

You may not think that healthcare shares would be first in line to benefit from the interest rate cut discussions, but AbbVie (ABBV) is a great example of a company that can benefit from lower borrowing costs resulting from lower interest rates. This is because AbbVie has a strong and reliable cash flow of over $22 billion per year along with a significant debt load of around $70 billion.

Generally speaking, companies with a financial footprint like AbbVie can borrow a little more freely (and economically) when interest rates fall. This could include issuing new corporate bonds, as well as restructuring existing debt to achieve a more favorable payment schedule. As a research-based pharmaceutical company, ABBV needs cash to fund potential therapies in its pipeline; lower interest rates give it the financial space to do so.

And if rates don’t budge a bit? No problem. AbbVie is one of the top five pharmaceutical companies by revenue, so it’s not going anywhere. What’s more, it’s one of the best dividend stocks for reliable dividend growth and offers a generous 3.3% yield.

Constellation Energy

rows of solar panels

(Photo source: Getty Images)

Sector: Tools
Market value: $59.3 billion
Dividend yield: 0.8%

It’s a completely different industry, but perhaps even more capital-intensive. Constellation Energy (CEG), utility shares focused on generating renewable energy. The company operates about 33,000 megawatts of generating capacity consisting of nuclear, wind, solar, natural gas and hydroelectric assets – as you can imagine, building more of those dams, solar panels and wind farms doesn’t come cheap. Lower financing costs mean an easier path to growth for CEG.

It’s also worth noting that the current high interest rates haven’t deterred Constellation. The stock is up a staggering 80% over the past 12 months on a total return (price change plus dividends) basis – an incredible feat for a stock that sits in a typically sleepy Wall Street sector.

And high-energy applications like artificial intelligence (AI) and cryptocurrency mining are driving demand for utilities. Plus, CEG’s focus on renewables positions it well in the era of climate change, so it’s easy to see why investors are bullish on the stock.

That success came even as the Federal Reserve kept interest rates at their highest level in about two decades, so a decline in key interest rates could help boost stock prices further.

Ford engine

ford logo 2

(Photo source: Getty Images)

Sector: Consumer Discretionary Goods
Market value: $40.2 billion
Dividend yield: 5.9%

Ford engine (F) was one of several automakers to scale back production of its long-awaited fleet of electric vehicles (EVs) over the past year. That’s because the current economics of electric vehicles are a bit more difficult than executives had anticipated. Higher borrowing costs, for example, are causing headaches for both car buyers and automakers who have to retool factories to accommodate the change.

But make no mistake, the future of cars is electrified — and, as you can see from the Ford Lightning F-150 and the all-electric Mustang Mach-E, the company is steadily moving in that direction. It just needs a little more encouragement to get up to speed, and lower interest rates could help it get there.

With more than $100 billion of long-term debt, for a carmaker like Ford, interest rates matter as much as product mix.

Verizon Communications

Verizon logo on a phone placed on a computer keyboard.

(Photo credit: Omar Marques/SOPA Images/LightRocket via Getty Images)

Sector: Communication services
Market value: $171.4 billion
Dividend yield: 6.6%

Verizon Communications (VZ) has even more debt than Ford — about $173 billion, according to Morningstar. As such, the telecom giant is another example of a large company with stable cash flow and a strong balance sheet that would benefit from cheaper debt financing at lower interest rates.

Running the largest wireless network in the U.S., with about 115 million subscribers, isn’t a cheap business model. What’s more, even as Verizon invests in upgrading and maintaining its wireless network, the company is aggressively spending money on fiber connectivity for homes and businesses in more than 57,000 miles of fiber optic implemented from 2020

VZ is the bluest of the blue chip stockswith massive Market capitalization and a generous 6.6% dividend, so it’s not going anywhere. But lower interest rates could help it maintain its edge going forward.

Well Tower

Welltower logo on smartphone with blurred logo in background

(Photo credit: Pavlo Gonchar/SOPA Images/LightRocket via Getty Images)

Sector: Property
Market value: $71.6 billion
Dividend yield: 2.3%

Senior Housing Specialist Well Tower (WELL) is one of many real estate stocks that will benefit from lower interest rates. This is because lower interest rates will lower the cost of borrowing for those looking to buy new land or build new properties. Unlike some of the riskier plays in real estate, WELL stock has held up quite well, even in a higher interest rate environment.

Specifically, occupancy rates at its properties are improving while cost pressures are easing. last business update for investors, Welltower increased its dividend payout by 10% and now boasts a solid yield of 2.3%. What’s more, WELL also raised its funds from operations guidance, a key indicator of the financial health of real estate investment funds (REITs).

It’s hard to bet against the continuing demographic trend of Americans aging, so there’s a clear long-term case for Welltower. And with the stock up nearly 40% in total return over the past 12 months — outperforming the S&P 500 — and the prospect of lower interest rates potentially boosting results in the coming months, there’s a clear case to consider this one of the best stocks to buy if the Fed cuts rates.