The Federal Open Market Committee (FOMC) is expected to begin cutting interest rates in the coming weeks after policy makers decided to leave the central bank’s prime interest rate unchanged at 5.25% to 5.50% at their July meeting.
More investors are beginning to price in the possibility of a near-term interest rate cut following softer inflation data for August. The U.S. Consumer Price Index (CPI), a broad-based measure of price stability for goods and services rose 0.2% for the month.
The 12-month inflation rate had fallen to 2.98% in July, putting the readings at their lowest since March 2021, and lower compared to July’s readings of 3.0% and 3.1% during the same period last year. Falling inflation has been an indication that the Federal Reserve’s monetary tightening has helped a damper on an overheated economy.
August’s labor market readings came in lower than expected. U.S. employers added a total of 142,000 nonfarm payrolls in the month, below analysts expected 160,000. Unemployment fell to 4.2% from 4.3%. Economists are concerned that the Fed’s “higher for longer” strategy could be doing more damage than anticipated.
Around 39% of futures traders expect the Fed to lower the policy rate to a range of 4.75% to 5.00%. Similarly, 69% of traders have said that they believe rates will be cut to a range of 5.00% to 5.25%, with the Fed lowering interest rates by 25 basis points. Considering historic CD rates depositors and investors are benefiting from rates as high as 5.20% as of August.
With traders pricing in a possible rate cut, which companies will benefit from a lower interest rate environment, and which stocks should investors keep on their radar?
Despite U.S. new car sales starting the year on a positive note, the latest readings have shown that new car sales have barely improved during the second quarter. On average, the automotive industry witnessed sales increasing 0.1% compared to the second quarter of last year.
Demand continues to decline as consumer spending dwindles even as dealerships offer bigger discounts and better deals. High interest rates have made the possibility of taking on large debt more expensive for would-be buyers and pricing them out of the market instead.
However, the coming months could bring a much-needed rebound for the American automotive industry, and automaker Ford (NYSE: F) could be at the forefront of benefitting from the improved activity.
Despite the slower widespread activity, Ford managed to post better-than-expected second-quarter results, with revenue of $47.8 billion and net income totaling $1.8 billion. The company largely benefited from improved sales activity for its Super Duty Truck, Transit Van, and hybrid models.
Sales of the Ford Hybrid Blue soared by 34 percent and currently represent around 9% of Ford’s global vehicle mix. Other notable revenue improvements were attributed to stronger pricing and favorable sales of truck volumes. Electric vehicle sales, such as the Ford Model e have yet to see improved performance due to wider industry pricing challenges, and strong competition in key markets.
Lower interest rates won’t only make taking on more debt more affordable for Ford’s customers, but considering that the company has more than $101 billion in long-term debt, a reduction in interest rates could significantly help to bolster the company’s Q3 bottom-line performance.
Ford stocks experienced tumultuous performance on the stock market, with prices sliding over 26% between mid-July and mid-August. After missing second-quarter earnings, stocks fell by 13%, however, in recent days, there have been some advancements, with stocks already up 0.33% since the start of August through to August 19.
Investors are holding out that Ford could beat earnings in the coming quarter, with the possibility of seeing better sales across most of its vehicle offerings, especially with their all-electric fleet.
The improved sales, against the backdrop of lower interest rates, could help the company deliver more favorable stock conditions. Considering that in the last three years, the stock has gained over 19%, climbing from levels of $9 in January 2021 to $25.19 a year later in January 2022, the company holds significant potential to provide investors with the upside they are looking for in a multinational automaker.
However, perhaps it’s important to mention that even as electric vehicle (EV) sales have started seeing slower demand in recent months, Ford could likely use the opportunity to monetize its gas-powered fleets instead.
Ford is capitalizing on the market that’s the most valuable to its business – gas-powered trucks. Increased sales, and strong demand for its Super Duty Truck, and similar models have prompted the company to announce the addition of a third North American truck assembly plant.
By the start of 2026, the company is expected to begin operating out of its Oakville Assembly Complex located in Ontario, Canada. The assembly plant is expected to deliver an additional 100,000 Super Duty trucks, and the company plans to roll out a multi-energy version in the near future.
Getting to this point hasn’t been without many challenges, and Ford stocks still have a long way to go before we can see those levels achieved at the beginning of 2022. Perhaps the upcoming months and the possibility of lower interest rates will help solidify consumer confidence, helping drive company performance, but allowing more favorable conditions for F stocks among investors.
While we acknowledge the potential of Ford as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as Ford but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Disclosure: I have no position in Ford.
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