Talks of a rate cut are back after the FOMC meeting concluded yesterday. Rates were kept unchanged for now, but the Federal Reserve expects that interest rates will go down by 0.5% this year. This implies two 250bps cuts this year.
Of course, things could still change if data keeps coming hotter. Powell called tariff-related inflation “transitory,” but things didn’t go so well the last time it was used. However, if the Federal Reserve stays dovish and cuts interest rates, certain stocks could surge significantly.
The market is green today due to bond yields falling after the Fed meeting. Once those rate cuts actually materialize, these three stocks could deliver triple-digit gains:
Upstart Holdings (NASDAQ:UPST) is a stock I featured first in an April 2023 article titled “7 High-Risk, High-Reward Stocks That Could Pay Off Big-Time,” and its returns so far have been bigger than I could’ve ever thought. Admittedly, rate cuts haven’t been as aggressive as one would’ve expected back then.
Regardless, I believe UPST can build on its performance even more and deliver multibagger gains from here. The slight rate cuts up until now have allowed it to deliver multibagger gains, but it still has room to surprise more to the upside if rate cuts continue in 2025 and 2026. Even if rates stay the same, I still have high conviction in the company due to how well its financials have recovered.
Q4 2024 revenue increased 46.7% to $226.4 million and beat estimates by 20.4%. Net income is nearly at breakeven, and analysts expect positive EPS for the full year 2025. In 2026, they expect EPS to cross $2 after growing nearly 50% and expect another near 50% growth in 2027.
Revenue is also expected to grow 58.3% in 2025. These results alone should drive up the stock as long as Wall Street holds up the premium. If rate cuts go into effect, it help Upstart deliver hefty earnings beats.
The biggest problem here is definitely debt, but the company has dealt with it well. Net debt is slowly coming down, and the top-line growth is making the impact of debt less of a concern.
American Airlines (NASDAQ: AAL), much like many other airline stocks, has been reeling from COVID’s ripple effects. The stock is still down 61% from pre-pandemic levels. The company took on significant amounts of debt during the pandemic. Interest rates were low back then, and most airline companies took on debt to wait out the travel restrictions. It didn’t help that American Airlines entered the COVID-19 era with one of the weakest balance sheets in the industry.
By the time things normalized, rate cuts were already going up fast, and servicing that debt compressed margins significantly.
The stock is still down 23% in the past year and has tumbled 34% year-to-date due to weaker-than-expected demand and a pessimistic outlook for early 2025. American Airlines forecasted a wider adjusted loss per share for the first quarter of 2025 of 60-80 cents, compared to 20-40 cents previously.
The selloff since then is more than prices in the bearish argument at current prices. The stock trades at less than 10 times earnings now, and it could see a significant boost from rate cuts. Interest expenses were $1.93 billion in FY2024. Even a small rate cut would help margins, and could boost sales by stimulating travel demand.
The consensus price target of $19.3 implies 72% upside.
Fintech companies tend to thrive during lower interest regimes. Lower rates stimulate a lot more spending volume, from which these companies benefit. In 2021, fintech stocks delivered triple-digit returns. PayPal Holdings (NASDAQ:PYPL) delivered 150%-plus gains during the post-COVID boom.
Obviously, it's unlikely that we’ll see interest rates go down as low as they did in 2021 anytime soon. PayPal can still deliver some solid gains from its current price below $70. The stock has traded essentially sideways for the past three years. This is despite PayPal doing multi-billion buybacks and continuing to grow its top line.
Rate cuts could be the trigger that could finally help PYPL stock pull off a sustained rally. The stock is down 43% from pre-pandemic prices. It is one of the most recognizable brands worldwide and is accepted by almost every online vendor. It seems unlikely to disappoint in the long run as growth is expected to pick up in the coming years.
