The Federal Reserve is telegraphing a possible September rate cut that will supercharge the stock market. If inflation continues to fall, Fed Chair Jerome Powell noted that “a reduction in our policy rate could be on the table” when the committee next reconvenes in mid-September, leading to the formation of some good stocks for rate cuts. 

If the Fed does cut rates it will prompt the first decrease in lending rates in four years. Lowered borrowing costs will prompt increases in economic activity at all levels. Businesses will have access to cheaper capital that will prompt borrowing to stimulate growth which in turn drives the economy higher in aggregate. Consumers will respond similarly to lower rates. That should stimulate spending across all sectors, sending shares higher.   

That isn’t to say the effects will be felt equally across all sectors of the market. Certain shares tend to fare better in a rate-cut environment. Tech, financial, and consumer discretionary shares tend to perform better for a multitude of reasons. Let’s look at some of those shares which are set to skyrocket on incoming rate cuts. 

Realty Income (O)

Realty Income (NYSE:O) is a well-respected real estate income trust (REIT) stock that is truly worth buying. Generally speaking, REITs focused on commercial property and the residential sector do particularly well as rates fall: Rate cuts alleviate substantial pressure in those firms. Realty Income is a commercial REIT that rents commercial properties to industry-leading firms on a long-term basis. 

So, it already enjoys strong performance due to its ability to contract with high-performing firms. Realty Income also operates those contracts under the net lease structure. That means most expenses associated with its properties fall on the lessee and not Realty Income. 

REITs like Realty Income have gone largely underappreciated for the past few years as high bond yields have made their dividend income less attractive. That has shifted more recently as bond yields correct. Realty Income should strengthen even more as September approaches and the positive effects of rate cuts become more apparent to potential O investors. None of that even considers the monthly dividend paid by Realty Income. Reinvestment periods are more frequent and that is but one more reason to consider O stock currently. 

Amazon (AMZN)

Amazon (NASDAQ:AMZN) is sort of an obvious pick among stocks set to skyrocket on incoming rate cuts. Tech stocks are generally seen as strong investments as borrowing costs fall. They tend to rely heavily on financing to expand and cheaper lending makes those investments more attractive overall. Amazon, as one of the best tech stocks, benefits as well.

Amazon currently has more than $135 billion in debt. That debt has an effective interest rate of 1.91% and results in a quarterly interest payment of $2.576 billion. Amazon, like everyone else, benefits from the ability to lower that payment as rates fall. 

The e-commerce giant has more than $85 billion in cash on hand currently. It could find a way to pay off its debt if management decided it was a pertinent strategy. Earnings are expected to grow by approximately 30% on average over the next few years so Amazon’s debt is not a problem. Regardless, it will become more manageable as soon as rate cuts occur. 

Amazon will also benefit from a surge in discretionary spending that usually occurs when rates fall. Consumer confidence rises and retailers including Amazon benefit. 

Tesla (TSLA)

Tesla (NASDAQ:TSLA) is going through a patch of trouble that isn’t necessarily reflected in its current stock price. Profit margins are as bad as they’ve been in 5 years and the company continues to cut prices which will only exacerbate its issues. Why then should investors consider TSLA shares?

Well, for one, Tesla is well-positioned to benefit from upcoming rate cuts. As my colleague Larry Ramer noted, Tesla heavily subsidizes the loans used to purchase its vehicles. As rates fall those loans will perform better, improving the bottom line.

It’s also worth noting that vehicle purchases generally rise in a falling rate environment. Consumers, bolstered by lower lending rates, tend to go out and purchase vehicles more often. 

Beyond that, R&D investments also become cheaper. Tesla continues to develop its humanoid robot known as Optimus. Elon Musk is very optimistic about its potential effects on the company and suggests that it could make Tesla a $25 trillion dollar company in the future. However, it has not yet met expectations which is very typical of Tesla projects overall. Anyway, lower rates will cheapen lending used to further research and develop Optimus which is another reason to consider Tesla at the moment.

Nvidia (NVDA)

Nvidia (NASDAQ:NVDA) continues to be one of the biggest stories in the stock market today. Its recent decline from $130 to adjust above $100, has irked investors. 

Pundits had worried that the shares would fall below $100 but at the time of writing, that doesn’t look to be the case. Instead, Nvidia shares jumped by nearly 13% in the 24 hours before this article was written. That sent prices above $117 reinstalling confidence in the AI infrastructure hardware narrative.

Nvidia is also a beneficiary of incoming rate cuts for the simple fact that AI spending should increase as rates fall. It’s logical to assume that AI hyperscalers will be upping their investment in Nvidia chips as a result of rate cuts.

Nvidia’s revenues are expected to double between this year and 2027. So, even though Nvidia has been volatile this year overall growth is nowhere near over. The growth and return on AI stocks is likely to come in stages. Those stages will not be even but Nvidia will continue to be the best AI hardware play nonetheless among stocks for rate cuts.

JP Morgan (JPM)

Financial stocks including JPMorgan Chase (NYSE:JPM) generally perform well during rate cuts. JPMorgan Chase is a massive lending center after all: It benefits from a rush of demand as lower rates prompt businesses to invest and drive lending higher. 

JPMorgan Chase is the largest U.S. bank and the 5th largest globally as measured by assets. It’s also highly aligned with the business sector and should see greater lending demand than rivals like Bank of America (NYSE:BAC) which are more consumer-oriented.  

The company isn’t necessarily a stronger performer overall. But recent consolidation has made it a bigger behemoth and that matters. Investors will be looking to the financial sector and banks in particular as rate cuts occur. JPM shares will be top of mind for the sheer scale of the firm. As a result, it should appreciate in price. Don’t be surprised if share prices continue to rise after an already strong first half in 2024.

Apple (AAPL)

Apple (NASDAQ:AAPL) stock is poised to continue its strong performance following rate cuts. 2024 has not been easy for the iPhone seller and tech giant. Most of its 20% returns this year occurred following its AI announcements in June. It continues to deal with the effects of inflation and high rates of discretionary spending for high-priced items including the iPhone. Those effects have been felt globally, particularly in China where sales have slumped dramatically. 

Discretionary spending increases as rates fall. That implies that Apple’s flagging iPhone sales will benefit dramatically if rates fall. 

Investors continue to wonder when high AI capital expenditures will pay off for the tech giants. Apple. Those expenditures have served as a drag on prices of late. AMD’s strong earnings suggest that a clear answer in either direction will take time to emerge and that recent concerns about mega firms are overblown. 

Apple should benefit significantly from the application of AI to iPhones and the concurrent drop in rates that should prompt increased discretionary spending and boost stocks for rate cuts like AAPL. 

Home Depot (HD)

Home Depot (NYSE:HD) has historically performed well as rates come down. The stock performs well for a simple reason: people tend to take out home improvement loans at higher rates as interest rates fall.

Now is arguably a good time to establish a position in Home Depot given that it trades below consensus target prices. Some investors would argue that Lowe’s (NYSE:LOW) makes a better trade given its lower valuation. However, Home Depot has always traded at a richer valuation than Lowe’s. It is the dominant home improvement company and with that comes higher prices.

Furthermore, Home Depot is enacting a $500 million cost-cutting initiative which should result in stronger earnings. In turn, that should help to justify HD stock’s richer valuation relative to its main competitor. 

In short, there is a blend of macroeconomic and internal factors at play which should catalyze Home Depot stock to move higher in anticipation of incoming great cuts.

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.

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