Stock market investors who are bullish on U.S. interest rate cuts in 2024 can look to many factors to substantiate their hopes. As expected, the Federal Reserve did not cut rates at the most recent central bank meeting. However, the expectation of one or two cuts this year remains.
The European Central Bank (ECB) on the other hand, did cut rates. The ECB lowered the benchmark rate from 4% to 3.75%, ahead of U.S. policymakers. Inflation reached 2.6% in May, higher than the ECB’s 2% target rate. Still, the central bank decided to implement rate cuts. That could cause speculators stateside to become bullish on cuts despite above-target inflation here.
The news again raises the question of which stocks make the best investments in anticipation of lower lending costs this year.
Grab Holdings (GRAB)
Grab Holdings (NASDAQ:GRAB) is a strong stock choice overall due to companywide improvements. Additionally, it’s a good choice in light of anticipated rate cuts, which will lower lending costs.
One of the most obvious reasons to consider investing in Grab Holdings is that the company is fast approaching overall profitability as measured by net income. The company made strong improvements during the first quarter leading to a loss of 3 cents per share overall. Those improvements led the company to increase EBITDA guidance by $70 million during the second quarter. The company is on the cusp of profitability. By itself, that is a great reason to invest in Grab at sub-$4 prices.
However, the expectation of rate cuts is also important to understand. One of the primary reasons Grab was capable of reducing its losses by $134 million in Q1 was reductions in net interest expenses. Net interest expenses will fall even more when rate cuts are implemented. That suggests improvements could be even more substantial moving forward.
Nvidia (NVDA)
It’s pretty easy to imagine why Nvidia (NASDAQ:NVDA) stock will grow even faster in the wake of rate cuts. Lower lending rates incentivize greater borrowing volumes leading to greater overall investment in artificial intelligence. In other words, more companies can buy more Nvidia chips the less expensive borrowing becomes.
However, Nvidia has trouble supplying the demand for its chips currently. That would lead some to argue that lower borrowing costs really don’t matter since supply is already maxed out. However, lower lending rates increase capital demand which will in turn increase demand for chips. That could allow Nvidia to raise prices even further for its chips.
There’s another reason to believe demand will rise: Nvidia’s 10-for-1 stock split. Shares just got a whole lot more accessible after rising above $1,200. The more accessible those shares become due to lower prices, the higher overall demand should be. Overall, there are multiple reasons to continue to believe that Nvidia stock will rise higher still.
Alphabet (GOOG, GOOGL)
Investors should absolutely pick up Alphabet (NASDAQ:GOOG, GOOGL) stock in anticipation of rate cuts. I’d argue that investors simply need to take a look at the most recent earnings report, its strength, and how rate cuts will affect upcoming earnings. All of those factors suggest Alphabet, aka Google, is a strong stock to pick up at the moment.
Advertising revenue drives Google’s success and rebounded in the first quarter, indicating a strong economy overall. Companies everywhere use Google for advertising and strong revenues are a strong indication of economic strength overall. That is precisely what Google’s first quarter earnings report showed.
The economic theory is very straightforward: rate cuts reduce lending costs, driving greater investment volume across businesses of all sizes, resulting in higher advertising revenue overall.
Google shares trade for $178 at the time of writing. There’s plenty of reason to believe that those shares could rise to values above $200. Overall, Google is simply an easy play to make for those who believe the economy will strengthen from here.
Advanced Micro Devices (AMD)
Like most growth stocks, Advanced Micro Devices (NASDAQ:AMD) will benefit greatly when the Federal Reserve implements rate cuts. It is generally considered to be a strong investment at the moment due to its positioning as the second most-important artificial intelligence (AI) stock.
Any reasonable investor likely wants to know how competitive Advanced Micro Devices can be compared to Nvidia. Not only that, investors also need to know whether AMD is objectively competitive. Fortunately, there’s a relatively easy way to judge both of those qualities.
The answer is a simple metric called gross margin percentage. It’s a useful tool to measure pricing power at a given company. Gross margin percentages above 40% indicate a strong competitive advantage while levels above 70% indicate exceptional pricing economics.
AMD’s gross margin percentage increased to 47% in the first quarter from 44% 12 months earlier. The company has an objective competitive advantage despite the fact that Nvidia’s gross margin percentage is much higher, at 78%.
That also reaffirms what investors already knew about AMD and Nvidia: Nvidia can price its chips exceptionally highly but AMD also makes great money as the second best chip maker.
Canadian Pacific Railway (CP)
Canadian Pacific Railway (NYSE:CP) is a reasonable investment to make in anticipation of increasing freight volumes following rate cuts. Broadly speaking, logistics firms should thrive in the wake of rate cuts due to an overall uptick in economic activity.
Firms everywhere will be purchasing increasing volumes of materials and other goods that require shipping. Again, simple economics are at play here: lower lending equals greater economic activity overall.
One of the things that makes Canadian Pacific Railway particularly attractive is how undervalued it appears to be at the moment. Shares trade for $78 but are expected to rise to $96 on average. The stock also includes a modest dividend yielding 0.7%. The dividend itself has not been reduced since 2009. With a payout ratio of 20% it’s highly unlikely that the company will reduce the dividend anytime soon.
Canadian Pacific Railway is well regarded income stock with broad exposure to the benefits of rate cuts.
Nu Holdings (NU)
Nu Holdings (NYSE:NU) operates a digital banking platform serving customers in important Latin American markets and is a growth stock favored by Warren Buffett.
Let’s start with the first part of that statement because it’s particularly relevant at the moment. Investors everywhere continue to recognize the increasing opportunity in banking the unbanked, especially in growing economies including Mexico, which Nu Holdings serves. It is showing accelerated results in Mexico and Colombia in comparison to its main market Brazil, at similar points in their respective development.
The company’s most recent earnings print from May 14 also showed that EPS increased by $164% during the quarter. Strong fundamental improvements are one of the reasons Nu Holdings appeals to Buffett-style investors.
It all suggests that investors who missed out on the drastic share price increases so far in 2024 continue to have an opportunity moving forward. Nu Holdings will continue to thrive with or without rate cuts.
Snowflake (SNOW)
A lot of contrarian investors are increasingly bullish on Snowflake (NASDAQ:SNOW) stock.
Shares fell off a cliff in February when CEO Frank Slootman stepped down and Sridar Ramaawamy took the helm.
Investors everywhere are wondering whether a huge opportunity is afoot. While the company did recently miss earnings, revenues were stronger than anticipated. Snowflake is currently benefiting from the AI boom and continues to collaborate with leaders in the space including Nvidia.
Revenues grew by 33% during the first quarter. So, despite the massive drop in share prices, Snowflake continues to be solidly within a group of high-growth companies overall and a data center pick as well. The company already raised its revenue outlook for the full year from $3.25 billion to $3.3 billion.
The potential for future growth due to collaborations with Nvidia will continue to excite some investors. The combination of all those factors and rate-cut prospects means Snowflake has a legitimate chance to provide massive returns very quickly at current share prices.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
