When Home Depot (HD 1.61%) talks, the stock market listens. The blue chip Dow Jones Industrial Average component is a bellwether for consumer spending and the housing market.
In recent years, Home Depot's results have disappointed. Earnings have been falling, and fiscal 2025 same-store sales are expected to grow by just 1%. But that sluggish growth could quickly fade into the rearview mirror.
In an effort to maximize employment and reduce inflation to 2% over the long run, Jerome Powell and the Federal Reserve are cutting interest rates by 0.25% -- citing a weak labor market and "somewhat elevated" inflation. More cuts could be in the cards to boost consumer spending and avoid a recession. Although artificial intelligence (AI) has been driving the stock market to record highs, U.S. gross domestic product growth is projected to be just 1.6% in 2025 and under 2% every year through 2028 -- illustrating weakness in the broader economy.
Here's why an interest rate cut is great news for Home Depot, and whether the dividend stock is a buy now.
Image source: Getty Images.
A much-needed jolt
Higher interest rates have a significant impact on consumer spending, particularly on discretionary goods, services, and travel. When money is more readily available for borrowing, consumers may opt for a car loan or a mortgage because the monthly payment is lower. Or they may finance a home improvement project. In this vein, lower interest rates can lead to an increase in renovation projects, which benefits Home Depot.
There's a big difference between going to Home Depot for a few spare parts to fix an appliance and redoing an entire room or section of a house. And Home Depot's poor results suggest that a lot of customers are putting off big projects until conditions improve.
On its August earnings call (second quarter 2025), Home Depot said that lower interest rates would help boost demand and provide relief for mortgages. Home Depot CEO Ted Decker said the following:
When we talk generally though to our customers, each of our sets of consumers and pros, the number one reason for deferring the large project is general economic uncertainty, that is larger than prices of projects, of labor availability, all the various things we've talked about in the past. By a wide margin, economic uncertainty is number one.
The prospect of good-paying jobs and lower interest rates could certainly give Home Depot's residential business a lift. However, the company has also been investing heavily in its professional and commercial contractor business. In June 2024, Home Depot completed its $18.25 billion acquisition of SRS Distribution, expanding its home improvement and construction business. SRS specializes in selling roofing products to contractors -- which provides cross-selling opportunities with Home Depot's retail outlets.
Home Depot made the SRS acquisition in the middle of an industrywide downturn -- a sign that it is investing for the long term. SRS essentially makes Home Depot even more of a coiled spring for the next cyclical expansion period, potentially amplifying the benefits the company will feel from lower interest rates.
NYSE: HD
Key Data Points
Taking a home improvement rebound for granted
The market is forward-looking and cares more about where businesses are headed than where they have been. And unfortunately for investors considering Home Depot, the stock is already priced as if interest rates will continue to fall.
As you can see in the following chart, Home Depot's earnings were on the rise leading up to the pandemic, then entered a new phase during the pandemic as consumers accelerated spending on do-it-yourself home improvement projects, driven by low interest rates.
But Home Depot's earnings have been ticking down in recent years even though its stock price is around an all-time high -- suggesting that investors are looking past the company's near-term struggles in anticipation of a recovery.
In February, Home Depot raised its dividend by the lowest amount in 15 years and issued a dire warning to investors about a prolonged downturn in the home improvement industry. So it could take several interest rate cuts to really move the needle on consumer spending at Home Depot.
In the meantime, the stock is on the expensive side, with a price-to-earnings ratio of 28.2 and a forward P/E of 27.7 compared to a 10-year median P/E of just 23. Meaning that Home Depot's earnings would need to grow 20% faster than its stock price just for the valuation to come back down to historical averages over the last decade.
A quality company at a premium valuation
Home Depot is an excellent company, but it is already priced for a recovery. So the stock isn't a screaming buy now.
The good news is that Home Depot could still be a good buy for long-term investors who believe in the company's potential for store expansions, same-store sales growth, and that the SRS acquisition will pay off. If Home Depot enters a multiyear period of double-digit earnings growth, its valuation could quickly come down, making the stock more attractive.
Home Depot could also reaccelerate its dividend growth rate, building on its 16-year track record of consecutive annual dividend raises. Home Depot yields 2.2% -- which is better than the 1.2% yield of the S&P 500.
All told, Home Depot isn't a no-brainer buy now because the stock price has run up ahead of anticipated rate cuts. But it's still a decent buy for long-term investors.
