Two stocks likely to benefit from Fed interest rate cuts

• Fed set to lower fed funds rate on Wednesday with 25 bps cut expected.
• Stock market mixed in runup as China nixes imports of Nvidia AI chips.
• Brandywine Realty stock stands to benefit from lower interest rates.
• Bank OZK’s real estate operations could also benefit from rate cuts.

The stock market is noticeably mixed on Wednesday in the leadup to the Federal Reserve’s (Fed) interest rate decision, scheduled for 14:00 EST.

The typically more circumspect Dow Jones Industrial Average (DJIA) has risen over 0.6%, led by American Express (AXP), Walmart (WMT) and Caterpillar (CAT), while the NASDAQ has retreated a similar level due to a sell-off in big tech. The negative tech sentiment is being led by reporting that Chinese government entities are demanding that domestic tech firms stop buying Nvidia (NVDA) AI chips.

The US Treasury yield curve is flattening in the run-up to the interest rate decision. The 30-year bond yield fell 0.3%, while the 2-year and 5-year both have yields rising 0.75% and above.

Besides the expected 25 bps cut, investors are looking for the Fed’s dot plot to show further predictions of cutting. The June dot plot showed the fed funds rate ending this year at 3.9% and at 3.6% next year.

This would mean that the Fed would cut the fed funds rate by 25 bps at two of the three remaining meetings this year. But Deutsche Bank came out this week expecting the Fed to cut three times or 75 bps, and Standard Chartered and Societe Generale said this week they expect the central bank to cut 50 bps on Wednesday.

Wednesday’s decision and the dot plot will give investors a clearer idea of what to expect and how it may aid certain stocks more than others. Here are three stocks that stand to benefit from a rate-cutting cycle.

Brandywine Realty (BDN)

The real estate investment trust (REIT) is heavily focused on office towers in Philadelphia, Pennsylvania and Austin, Texas, owning 125 properties in total. With vacancies in the office category failing to compress as much as expected following the great CEO ‘back to office’ push, REITs like Brandywine could benefit greatly from lower interest rates.

On top of the unattractive vacancy rates, Brandywine developed an expensive life sciences campus that it has failed to find a tenant for. Instead, it has had to lease out space at the campus for much cheaper office tenants in order to stay afloat.

The company is clinging onto a 13% dividend despite cutting it twice after the Fed hiked interest rates in 2022. The high yield is also a product of BDN stock falling 59% over the past five years. But Brandywine now bears a dividend payout ratio above 100%, which is cutting into its cash pile.

Brandywine has $2.34 billion in debt and a long-term-debt-to-equity ratio of 264%, similar to many REITS. If the Fed were to cut the fed funds rate by at least 100 basis points over the next year, Brandywine could refinance many of its existing loans, reposition its balance sheet for growth, and exit the current quagmire.

Bank OZK

Financials are another industry that greatly benefits from lower interest rates. Since banks borrow short-term at lower rates and lend long-term at higher rates, they benefit from a steepening of the Treasury yield curve.

When the Federal Reserve’s Federal Open Market Committee (FOMC) decides to reduce interest rates, this normally pushes down short-term rates more heavily than long-term rates, thus steepening the curve and widening the margin where banks make money.

Bank OZK is a regional operation and used to be called Bank of the Ozarks. From that name, you’ll know that we’re talking about an Arkansas bank, but the once small operation has extended itself into the Texas, North Carolina, Georgia and Florida markets as well. The bank is a major player in real estate, and lower interest rates would allow some endangered borrowers to refinance into easier payment schedules.

This should then allow Bank OZK to be less worried about counterparty risk, giving it the option to extend its lending operation. Bank OZK has been on a long-term growth spurt, and lower interest rates would allow that growth to continue.