The Federal Reserve has hiked benchmark interest rates 10 times in a row, starting in March 2022.
However, at its meeting on June 14, that streak could come to an end. With the federal funds rate now at 5% to 5.25%, it's hovering in the range where central bankers expect to be at the end of this year, and the inflation rate continues to come down. The May Consumer Price Index report showed prices rose just 4% year over year last month, the slowest rate since March 2021. Furthermore, most economists expect the Fed to take a break from raising rates at its meeting.
While a pause in rate hikes isn't guaranteed, if it happens, it's likely to move markets and will impact stocks that are sensitive to interest rates. Here are three to buy if the Fed interest rate hike pause goes through.
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1. Upstart
Upstart (UPST -3.95%) may be best known as the belle of the 2021 stock market ball. Shares of the AI-based lending company skyrocketed following its IPO in December 2020. However, after dazzling investors that year, the stock cratered in 2022 as interest rates rose, access to credit tightened, and its lending partners grew skittish.
After last year's reset, the stock fell more than 97% from its peak, but investors seem to sense that the macroeconomic winds are now shifting in its favor. Upstart has soared 162% since the beginning of May as the company's first-quarter earnings report seemed to indicate it was turning the corner, and it signed an agreement with investment manager Castlelake to buy up to $4 billion of its consumer loans, giving it a much-needed outlet for its loan originations.
Since then, the stock has rallied on hopes for a new bull market and an extended short squeeze. A Fed rate pause could be the next leg up for Upstart.
The company, which uses proprietary AI algorithms to screen borrowers, saw demand for its loans dry up as the bear market hit and rates rose, but a reversal of that trend should have the opposite effect. Upstart was highly profitable when the economy was booming in 2021, and profitability could return swiftly in a friendlier environment.
A break in the Fed's rate hikes is the first step to unwinding the interest rate pressure that has squeezed Upstart, and, with the stock still down more than 90% from its peak, it has a lot of upside potential if the economic climate becomes more favorable.
2. Home Depot
Like Upstart, Home Depot (HD -0.77%) was a winner during the pandemic, but lately, the stock and the business have entered a slump.
Home prices and sales activity are both down, which is putting a damper on the leading home improvement retailer, as the company now sees revenue and profits declining this year.
Higher mortgage rates are a major reason for that shift. The increase in mortgage rates not only makes it harder for Americans to afford to buy a home, but they also impact the rates of home equity lines of credit and other financing tools homeowners might use to, say, remodel their kitchen or put in a new deck.
A lasting rate pause would help lead to a rebound in home sales by effectively putting a cap on mortgage rates, and CFO Richard McPhail told investors on the recent earnings call that he believed the housing market had already absorbed the impact of higher rates, which could support a faster-than-expected recovery in home sales.
After the sell-off, Home Depot is trading at an excellent value, at a price-to-earnings ratio of 18, making it cheaper than the S&P 500. Despite the cyclical headwinds, this is still a company with significant competitive advantages and a track record of raising its dividend by double-digit percentages each year, as well as a history of trouncing the broad market.
3. Carnival
As the world's largest cruise line operator, Carnival (CCL -2.05%) was hit hard by the pandemic, and the company had to raise debt and dilute shareholders just to stay afloat, as cruise ships were grounded for roughly a year.
However, with the COVID-19 emergency now over, cruisers have come back with a vengeance. Carnival experienced its highest booking volumes for any quarter in its history in the first quarter, and customer deposits reached a first-quarter record of $5.7 billion, up 16% from the previous high in 2019.
While Carnival is a global company, an end to higher interest rates in the U.S. will help stave off a recession and continue to stoke already strong consumer demand. In addition, lower interest rates would give the company an opportunity to refinance its debt, some of which is at interest rates above 10%, and would lower rates on its variable-rate debt.
Even after the recent rally, Carnival is trading substantially below pre-pandemic levels, but a combination of strong consumer demand and lower interest rates could propel the stock significantly higher.
