In my perspective, the projected actions by the Federal Reserve concerning interest rates in 2025, together with two potential profitable stocks to consider.
In the recent turn of events, predictions regarding interest rates in 2025 have experienced a significant shift. The frequently strong economic data, persisting inflation rates slightly surpassing the desired 2% threshold, and the Federal Reserve's statements have led to a stunning transformation in expectations. From anticipating around 4-5 quarter-point rate cuts in 2025, the median expectation now stands at just a solitary cut, as per the CME FedWatch tool.
Just a while ago, I penned an article discussing bold predictions for 2025, one of which was a prediction that the Federal Reserve would eventually reduce rates by a full percentage point this year. I envisioned economic uncertainty combined with inflation approaching the 2% target causing the Fed to exhibit a tad more assertiveness.
While a handful of sectors display negligible sensitivity to rates, the financial services and real estate sectors are prime examples of beneficiaries should lower-than-assumed rates ensue. Two such stocks that might potentially gain substantially in 2025, if my forecast proves accurate, are:
EPR Properties
EPR Properties (EPR -0.96%) is a real estate investment trust (REIT) that specializes in experiential properties, boasting movie theaters, eat-and-play businesses (TopGolf is a significant tenant), waterparks, ski resorts, and more.
It's worth noting that almost every REIT exhibits sensitivity to interest rates. Lower rates imply lower borrowing costs, while decreasing rates also cause dividend yields to plummet, contributing positively to stock prices. EPR stands as a potential significant winner due to its growth strategy. The management perceives a $100 billion addressable market opportunity, but they are apprehensive about taking on more debt or issuing new equity at current interest rates, given the relatively low stock price. If interest rates fall faster than anticipated, this could accelerate a greater appetite for growth.
At its present stock price, EPR offers a 7.7% dividend yield, well within the company's profit margin coverage. Hence, not only does EPR hold long-term potential for its stock value, but investors also receive generous compensation for their patience.
SoFi
Most banks are likely to benefit from declining interest rates. Deposit costs have climbed drastically over the past couple of years, threatening interest margins. Online-based banks like SoFi (SOFI 6.71%), however, have higher deposit costs than traditional brick-and-mortar banks and could be particularly benefited by lower interest rates.
SoFi's average interest rate paid on its interest-earning assets (predominantly loans) amounts to 9.35%. This figure outperforms most banks, as SoFi relies heavily on personal loans. Meanwhile, the bank's average deposit cost is around 4.2%, closely mirroring the Fed's rate shifts. Therefore, if interest rates drop in 2025, the deposit cost is expected to fall simultaneously, with average yields falling more slowly due to longer loan terms, resulting in higher margins.
Lessening interest rates would likely augment demand for personal loans, supporting SoFi's growth momentum. There are other factors contributing to my optimism about SoFi as we venture into 2025. Despite its size, SoFi is still growing its membership base at an impressive 35% year-over-year pace, and its profits are also surging swiftly.
It is essential to recognize that investors with a relatively low risk tolerance may shy away from these two stocks, favoring safer alternatives within the real estate and financial sectors. However, EPR and SoFi are robust businesses driven by management teams with outstanding track records in diverse circumstances. If my interest rate projections come to fruition, both could have an extraordinary year in 2025.
- Given the recent shift in predictions concerning interest rates in 2025, investors might want to reconsider their investing strategies, particularly in sectors like finance and real estate, as the anticipated rate cuts could significantly impact stocks.
- If interest rates indeed cut down faster than expected in 2025, EPR Properties, a real estate investment trust specializing in experiential properties, could potentially witness a greater appetite for growth, benefiting both its stock value and dividend yield.
- In the context of banks, online-based banks like SoFi could be particularly advantaged by lower interest rates due to their higher deposit costs, leading to enhanced interest margins and growth momentum in personal loans.
- As we approach 2025, it's essential to consider the potential impact of lower interest rates on stocks and invest accordingly, staying mindful of the risk tolerance and looking for robust businesses with outstanding management teams, such as EPR Properties and SoFi.
