The Federal Reserve will almost certainly lower interest rates tomorrow – even though I argued vehemently against it last week. (Like my children, the Fed will probably ignore my sage advice.)So, if we do enter a rate-cutting environment, what stocks are likely to do well?Here are the top three sectors I expect to outperform during this new era.
1. Real Estate Investment Trusts
Real estate investment trusts, or REITs, are companies that buy real estate properties and rent them out to tenants. But these businesses don’t just buy houses or offices. They also own retail centers, healthcare facilities… even shelf space in data centers.A stock that I’ve held in the Oxford Income Letter portfolio for a long time – and that I still recommend – is Four Corners Property Trust (NYSE: FCPT).A former spinoff from Darden Restaurants (NYSE: DRI), Four Corners owns a ton of restaurant real estate, much of which it leases to Darden eateries. However, the company has expanded significantly in recent years, now holding properties in auto service, medical retail, and other retail as well.Four Corners’ adjusted funds from operations, which is the measure of cash flow used by REITs, has been steadily rising, enabling the company to hike its dividend for seven years in a row. The stock now pays a 4.6% (and growing) yield.
2. Homebuilders
There are not enough houses to meet demand in the U.S. The shortfall is staggering. It is estimated that we would need 7 million new homes in order to catch up with demand.And demand could soon increase even more. As interest rates fall, mortgages will become more affordable. If the 30-year fixed rate mortgage (which is currently averaging about 6.3% nationwide) dips below 6%, I believe we’ll see a rush of new homebuyers – especially if Vice President Kamala Harris wins the presidency.One of Harris’ campaign promises is a $25,000 subsidy to assist new homebuyers with their down payments and make homeownership more affordable.So demand is set to increase strongly, while supply is still tight.I particularly like homebuilders that are catering to first-time buyers, as first-time buyers will likely be the most ready to make the leap to a new home in the coming year.Century Communities (NYSE: CCS) focuses on the entry-level market. In the company’s own words, this allows it to “target the broadest potential pool of customers.”Century had a down year in 2023, which is not entirely surprising given that interest rates were rising throughout the past two years. This year, however, the company’s numbers have rebounded.Revenue in the first half of the year grew by 24% over last year, while earnings grew 75%. Wall Street predicts robust 15% earnings growth in 2025.The stock trades at just 10 times earnings – well below the sector median of 14.6.It also pays a small dividend.
3. Utilities
Utilities tend to perform well when rates fall. This is because they borrow a lot of money, and falling rates mean lower interest expenses.The chart below shows the inverse relationship between interest rates (as measured by the 10-year Treasury yield) and the performance of the S&P 500 Utilities index.
Utilities’ strong dividend yields also become more appealing as rates decline, because low rates make it more difficult to find meaningful yields elsewhere.Duke Energy (NYSE: DUK) is based in North Carolina and delivers power to 8.4 million customers in seven states. It has one of the largest electricity transmission systems in the country.Excluding the pandemic year of 2020, revenue has been steadily growing since 2018. This year, profits are on pace to be the highest they’ve been in at least a decade.This is a very well-run company that sports a 3.5% yield.Generally speaking, falling rates are good for the stock market, and I expect these sectors and individual stocks to do particularly well.More By This Author:Is Spok Holdings Close To Being Able To Afford Its Dividend?Why Entravision Communications’ Dividend Could Be At RiskAvoid These Pitfalls Of Biotech Investing
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