- The July CPI report showed headline annual inflation rising 2.9%, the lowest since March 2021.
- The data could give the Fed the confidence to begin laying out the carpet for an outsized rate cut in September.
- Against this backdrop, I used the InvestingPro stock screener to identify some of the best companies to own amid the current market environment.
- Looking for more actionable trade ideas? Try InvestingPro for under $8/Month.
Wednesday’s much-anticipated U.S. consumer price index (CPI) inflation report for July came in a bit cooler than expected, providing further evidence that the Federal Reserve will soon start to cut interest rates.
Source: Investing.com
The July CPI report indicated that inflation rose by 0.2% for the month, compared to expectations for a gain of 0.2%. On an annual basis, the headline CPI increased by 2.9%, down from the 3.0% rise seen in June.
Source: Investing.com
This marked the smallest year-over-year increase since March 2021, signaling that the aggressive interest rate hikes by the U.S. central bank over the past year are finally having their intended effect on inflation.
Core CPI, which excludes volatile food and energy prices, rose by 0.2% in July, with the year-over-year rate easing from 3.3% to 3.2%, which was the lowest since April 2021. The forecast had been for an increase of 0.2% and 3.2%, respectively.
Source: Investing.com
While still above the Fed's 2% target, the decline in core inflation is seen as a positive sign that underlying price pressures are beginning to moderate.
That led markets to nudge up the chance of an outsized 50 basis point rate cut from the Fed in September to 50%, according to the Investing.com Fed Monitor Tool.
In this environment, certain sectors and stocks are positioned to benefit as the Fed shifts toward a more accommodative monetary policy.
Key Takeaway
The July CPI report has provided a much-needed boost to investor sentiment, with the prospect of a Fed rate cut becoming more likely. As inflation continues to cool, the central bank may find itself in a position to begin easing monetary policy, which could set the stage for a new phase of market growth.
What To Do Now Now
As the likelihood of a rate cut increases, investors should consider positioning their portfolios in sectors that historically benefit from a lower interest rate environment. Using the InvestingPro screener, I managed to easily identify several stocks with strong upside ahead worth considering amid the current market backdrop.
Source: InvestingPro
Here are three key areas to watch:
1. Growth Stocks - Microsoft and Alphabet
Growth stocks, particularly in the technology sector, stand to gain significantly from lower interest rates. Companies like Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), which have robust cash flows and significant growth prospects, are likely to benefit as borrowing costs decline. These tech giants are leaders in cloud computing, artificial intelligence, and digital advertising, making them attractive investments in an environment where the cost of capital is lower.
Microsoft's strong position in cloud computing through Azure and its growing AI capabilities make it a solid pick. Meanwhile, Alphabet, the parent company of Google, is a leader in online advertising and has a growing cloud business that could see accelerated growth with lower interest rates.
2. Consumer Discretionary - Amazon and Home Depot
The consumer discretionary (NYSE:XLY) sector is another area that could see a boost from falling interest rates. Lower rates can increase consumer spending power, as borrowing costs for mortgages, auto loans, and credit cards decrease. Companies like Amazon (NASDAQ:AMZN) and Home Depot (NYSE:HD) are well-positioned to benefit from this trend.
Amazon, the e-commerce and cloud computing giant, is a bellwether for consumer spending. As consumers have more disposable income due to lower borrowing costs, Amazon's retail and advertising businesses could see a significant uptick. Home Depot, a leading home improvement retailer, could also benefit as lower mortgage rates encourage more home buying and renovations.
3. Financials - JPMorgan Chase and Bank of America
While financial stocks typically face headwinds from lower interest rates, large banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) could still thrive in this environment. These banks have diverse revenue streams, including wealth management, trading, and investment banking, which can offset the impact of lower net interest margins.
Moreover, lower interest rates could lead to an increase in loan demand, boosting these banks' lending businesses. Additionally, with strong capital positions and robust dividend yields, JPMorgan Chase and Bank of America offer both growth and income potential for investors.
Conclusion
The July CPI report, showing inflation at its lowest level since 2021, has increased the likelihood of a Federal Reserve rate cut next month. In this environment, growth stocks, consumer discretionary companies, and select financials stand to benefit. By positioning portfolios in these sectors, investors can potentially capitalize on the Fed's shift toward a more accommodative stance, while also remaining vigilant to any shifts in the economic landscape.
As always, it's essential to stay informed and adjust your investment strategy as new data emerges. With the Fed's next moves still uncertain, flexibility and a focus on quality stocks will be key to navigating the market in the months ahead.
***
Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR® S&P 500 ETF, and the Invesco QQQ Trust (NASDAQ:QQQ) ETF. I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK).
I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.
The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.
Follow Jesse Cohen on X/Twitter @JesseCohenInv for more stock market analysis and insight.