Interest rates are at long last coming down as the Federal Reserve announced a significant 0.5% rate cut in September. More reductions in the interest rate are likely on the way.
Lower rates are usually viewed as good news for smaller businesses. However, they benefit huge corporations, too, including the market-leading group known as the "Magnificent Seven" stocks. What's the best Magnificent Seven stock to buy with the Fed cutting rates?
How rate cuts could benefit the Magnificent Seven
Let's first look at how lower interest rates could help the members of the Magnificent Seven. Three ways are the most important, in my view.
First (and most obvious), lower interest rates reduce Magnificent Seven companies' borrowing costs. This makes it cheaper to refinance maturing debt. They also enable companies to fund new projects that could lead to future growth.
Second, lower rates can boost customer spending. This can happen whether the customers are individual consumers or organizations.
Third, lower interest rates can lead to a weakening of the U.S. dollar. This benefits Magnificent Seven companies that export to other countries by making their products more competitive in international markets.
Evaluating the Magnificent Seven
Rate cuts should help all of the Magnificent Seven stocks. However, some will benefit more than others.
Amazon (NASDAQ: AMZN) has the most debt on its books in the group -- $157.8 billion. Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) trail behind with debt of $101.3 billion and $97.8 billion, respectively. Lower rates could help these companies the most when it comes to reducing interest expenses when their debt matures (assuming rates are still lower at that point).
Meta Platforms (NASDAQ: META) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) are in the middle of the pack, with debt totaling nearly $38 billion and $28.7 billion, respectively. Tesla's (NASDAQ: TSLA) debt load is only $12.5 billion, while Nvidia's (NASDAQ: NVDA) debt of $10 billion is the lowest of the Magnificent Seven.
I suspect that increases in customer spending fueled by lower interest rates would likely be most pronounced for the companies with the most expensive products. Tesla's electric vehicles can cost in the ballpark of $40,000 at the lowest, with the pricey models costing over $113,000.
Companies spend significant amounts to buy Nvidia's graphics processing units (GPUs), too. Lower rates could especially help start-ups and smaller businesses afford to expand their artificial intelligence (AI) development efforts.
Amazon, Alphabet, and Microsoft operate cloud service platforms that could benefit from increased customer spending, driven by lower rates. All three companies market consumer products that could see sales increase, as well. It's the same story for Apple and, to a lesser extent, Meta.
Apple and Tesla would arguably be helped the most by a weaker U.S. dollar. Sales outside the U.S. are greater for both companies than their U.S. sales. However, all of the other Magnificent Seven also have significant international sales.
I think that Amazon and Tesla will probably be helped the most by the Fed's rate cuts. Which is the better stock to buy? I'd go with Amazon.
Tesla is much more expensive than Amazon based on forward earnings multiples and facing increasing competition. Even worse, consumer interest in electric vehicles seems to be waning.
Meanwhile, Amazon's AWS cloud platform has a massive AI tailwind at its back. Advertising on Prime Video has become an important new growth driver for the company. Amazon's technology investments should continue to pay off in increased profitability for its e-commerce business. Project Kuiper, a new satellite internet service, is poised to be another new source of growth.
All of these would be positives for Amazon without lower interest rates. However, lower rates should put an extra bounce in the company's step -- and send its stock higher.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
What's the Best "Magnificent Seven" Stock to Buy With the Fed Cutting Rates? was originally published by The Motley Fool