Prediction: This Stock Will Be One of the Biggest Winners of the Fed’s Interest Rate Cut

Stocks have climbed this year, buoyed by excitement about the potential of artificial intelligence (AI) — tech stocks roared higher, helping the S&P 500 post a 20% gain so far. But one major problem has weighed on market sentiment, and that’s the high interest rate environment. The Federal Reserve has boosted rates over the past two years to tame runaway inflation. The efforts worked, but left consumers and businesses with higher borrowing costs, something that hurt their ability to spend, and this also weighed on companies’ ability to expand.

Last month though, the Fed made a key move to turn things around. The central bank cut rates for the first time in four years, going for a deeper-than-expected cut — 50 basis points instead of 25 — and suggested it will lower rates another half point by the end of the year.

This is positive news for those hurt by higher rates — consumers and companies, as I mentioned — as it sets them on the path toward lower expenses. Of course, it will take time for this to happen, and it probably will require additional rate cuts to significantly bring down costs. But the good news is things are moving in the right direction, and this should lead to brighter days for most growth companies. And my prediction is one stock in particular will be one of the biggest winners of the Fed’s rate cut.

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A player that serves consumers and companies

This player serves both consumers and companies, relying on the spending power of both, and it’s a giant in the high-growth businesses of e-commerce and cloud computing. The stock I’m talking about is Amazon (AMZN -0.64%).

This trillion-dollar company was hurt by higher interest rates in two ways: Many of Amazon’s e-commerce customers saw a decline in their buying power, and this meant they had less to spend on non-essential items. And certain customers of the company’s cloud computing business, Amazon Web Services (AWS), may have cut back their spending on projects as borrowing costs ballooned. This is particularly the case of younger growth companies that rely on taking on debt to expand.

This market giant also suffered from the problem higher rates came to address: rising inflation. In fact, these higher prices weighed so much on Amazon that in 2022 it reported its first net loss in about a decade.

Now, though, with prices under control — thanks to the rate increases — and with rates now declining, Amazon’s earnings and share performance could greatly benefit. It’s important to keep in mind that during the period of rising inflation, Amazon implemented major changes to its cost structure, efforts that helped the company quickly return to profitability.

For example, Amazon worked on efficiency throughout its fulfillment network and in the U.S. switched to a regional model from a national one — to cut down on delivery time and cost. These and other efforts worked. Last year, Amazon reported more than $30 billion in net income, and revenue climbed 12% to more than $574 billion.

A lower interest rate environment

And the cost structure measures should help Amazon maximize profitability in better market times. This brings me to today and the months to come, in a context of lower interest rates. Amazon should benefit because it’s a leader in e-commerce, and as consumers have more to spend, they’re likely to turn to Amazon not only for essentials but for other items they hesitated to buy on a limited budget.

The same is true for AWS customers. Those that held back on launching new projects may make the move as interest rates come down — and this should result in sales growth for AWS. As it stands, the business has gained momentum, reaching an annual revenue run rate of $105 billion recently.

So, my prediction is, Amazon — a company that suffered from both rising prices and higher interest rates — could be one of the biggest winners in a new, lower interest rate environment. As I said earlier, this won’t happen overnight as it takes time for interest rate changes to trickle down to general borrowing costs, and additional rate cuts are needed to make a major difference. But there’s reason for optimism about Amazon’s earnings growth and share performance over the long term, and that’s great news for Amazon shareholders today.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.