It is 100% certain that the Federal Reserve will reduce interest rates at its next meeting in September. Lowering borrowing costs has many investors wondering how interest rate cut stocks could perform. The cut may begin an easing monetary policy cycle that may continue for several years, depending on economic conditions.

Undoubtedly, the level of interest rates impacts stock market performance. Historically, when interest rates fall, stocks tend to rise. Lower yields make bonds less attractive, prompting investors to seek returns in equities instead. However, not all companies react the same way, as their unique circumstances differ.

Generally, lower rates facilitate increased investment using borrowed money. Smaller companies and more speculative stocks, as well as tech firms and banks, are often better-positioned to capitalize on changes in the economic environment. Notably, companies carrying high debt loads may save on interest payments by refinancing loans at lower rates.

Three interest rate cut stocks that could benefit from the anticipated Fed’s reduction in September include:

Best Buy (BBY)

The retail technology and appliance company Best Buy (NYSE:BBY) may benefit from increased consumer demand as interest rates on credit cards are expected to decrease. Lower interest rates are also expected to boost the lagging housing industry, making Best Buy one of the top interest rate cut stocks to consider buying ahead of September.

As people buy new homes, they often purchase many new appliances. In addition, the growth of artificial intelligence (AI) has driven higher demand for computing power. With pandemic-era computers now around four years old, many consumers may renew and purchase new home computers with AI capabilities. AI-enabled PCs are projected to be 18% of the market this year and jump to 40% next year.

Best Buy has relatively high levels of debt of 129.27% on its equity, which is typically negative for companies. However, it could reduce its interest expenses in a lower interest rate environment. The company has focused on efficiency and saw increased gross margin and EPS despite slower sales. Therefore, Best Buy may experience larger profit growth if the Federal Reserve cuts interest rates, leading to higher sales volumes.

PayPal (PYPL)

Interest rate cuts often spur increased spending and activity in stocks that benefit from financial transactions. PayPal (NASDAQ:PYPL) presents an attractive opportunity as one of the interest rate cut stocks being the leading online payment processor. Low interest rates could fuel transaction volumes and benefit PayPal’s business model in the months ahead.

As U.S. economic growth has slowed, PayPal has recently experienced some share price weakness. However, its fundamentals remain strong. EPS grew 18% in the first quarter and 11.70% year-over-year (YOY), and free cash flow (FCF) increased by 86% YOY. The company also reported double-digit margins and returned over 20% in equity to investors.

While PYPL stock rose and fell with the pandemic, its current valuation and profit growth appear compelling relative to the market. PayPal trades at a price-to-earnings (P/E) ratio of 15.3x, below the S&P 500 average of 29.1x. Analyst consensus gives it a buy rating with a $76.54 price target, representing a 26% upside potential.

Comerica (CMA)

Banks stand to benefit from interest rate cuts in several ways. Lower interest rates mean they can borrow at reduced rates while continuing to earn interest on existing fixed-rate loans made previously at higher rates. Banks also tend to see reduced loan loss provisions in more accommodative interest rate environments.

Among mid-cap banks, Comerica (NYSE:CMA) stands out as paying a relatively high dividend with a yield above the Fed’s current interest rates. It could potentially gain from a Federal Reserve interest rate cut and deliver a good return while waiting until the rate cut occurs.

In its most recent earnings report last week, Comercia beat estimates for earnings by 25%. However, CMA stock declined as net interest and fee income fell. Still, total loans increased and are expected to rise further with the Fed cut, making Comerica one of the interest rate cut stocks to consider buying.

Notably, amid the 2023 regional banking crisis, Comerica has focused on higher quality credit, allowing it to increase its capital levels and reduce past-due loans. With a strengthened balance sheet, the company avoided provisions in the second quarter and improved profitability. That positive trend may continue in the coming months.

On the date of publication, Stavros Tousios 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.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.