Stock Markets Rally on Fed Rate Hike – Which Stocks Could Do Better in the Face of Higher Interest Rates?

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Jhe Federal Reserve’s decision on May 4 to raise its benchmark interest rate by half a percentage point was met with wild applause on Wall Street, with stocks rising sharply on hopes that the hike could controlling inflation while helping the United States avoid a recession.

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The Dow ended the day up 2.81% to close at 34,061.06, CNBC reported. The S&P 500 gained 2.99% to 4,300.17, while the Nasdaq Composite rose 3.19% to 12,964.86. The S&P 500 and the Dow both posted their biggest gains since 2020.

Among the stocks that performed well were economic indicators such as Home Depot and Caterpillar, as well as banking stocks such as Citigroup and JPMorgan Chase. Big tech stocks also had a good day, with Apple and Alphabet, Google’s parent company, both gaining more than 4%. Fellow energy giants Chevron and Exxon Mobil rallied on Fed news. Starbucks and Airbnb climbed 9.8% and 7.7%, respectively, in part on strong earnings reports.

Once the initial euphoria has passed, you can expect most stocks to return closer to the norm. But some stocks could get a prolonged boost from rising interest rates because of their business models – and many are in the financial sector.

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Here’s a look at stocks that could perform better with higher interest rates, according to recent analysis from Kiplinger and Motley Fool.

AllianceBernstein (AB)

This asset management firm is one of the “best stocks for a rising rate environment,” Kiplinger said. One reason is that AB has about $780 billion in total assets, which means that a rate hike can allow it to better use idle cash in interest-bearing assets.

Bank of America (BAC)

Like other banks and financial institutions, Bank of America benefits from rising interest rates because it can earn more on new loans than it has to pay on deposits. BofA also has a large number of floating rate commercial loans, according to Motley Fool, which means that when the federal funds rate rises, the interest earned on these assets will also rise.

Charles Schwab (SCW)

Charles Schwab, like many banking/wealth management/financial advisory firms, does not perform as well in a low interest rate environment as its net interest margin is squeezed and its revenue declines. net interest and commission income on bank deposits are lower. . A rate hike would have a positive impact on Charles Schwab’s net interest income, as yields on interest-earning assets will rise faster than its cost of funding.

Discover Financial Services (DFS)

Discover is one of the best stocks in a rising rate environment because it can increase the rate it charges for outstanding credit card balances and also generate a return on dormant deposits, Kiplinger said. Additionally, higher rates will benefit the company’s growing non-credit card lending business, such as student loans and personal consumer loans.

Equifax (EFX)

As one of the three major credit bureaus in the United States, Equifax should see a recovery in business in a rising rate environment as consumers will be “eager to get their [credit] scores as high as possible to get the best deal,” Kiplinger noted. The company is also expected to benefit from revenue expansion from a series of acquisitions it has made over the past year or so.

Extra Space Storage (EXR)

Here is an outlier in that Extra Space Storage is not a pure financial company, but a real estate investment trust specializing in storage facilities. It should benefit from higher interest rates since it has increased its debt considerably in recent years to finance its expansion. As Kiplinger noted, the rate hike means these investments were “very timely” as Extra Space Storage locked in lower rates for much of its real estate holdings. It is also able to raise storage tariffs on customers.

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Silvergate Capital (IS)

Silvergate, which provides products and services to players in the cryptocurrency market, has nearly all of its deposits of around $14 billion in accounts that pay no interest to customers, Motley Fool reported. Since these accounts don’t accrue interest charges, Silvergate can get a major boost from higher interest rates, as it can earn higher interest income on its investments, but n will not have to pay interest on these accounts.

PacWest Bancorp (PACW)

This Los Angeles-based regional bank offers the usual range of deposit accounts, auto loans, and mortgages. The main reason it will benefit from a rising rate environment is that it will earn higher net interest margins on auto, home and business loans. According to Kiplinger, PacWest could be one of the best stocks of 2022 in a rising interest rate environment.

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This article originally appeared on GOBankingRates.com: Stock Markets Rally Following Fed Rate Hike – Which Stocks Might Perform Better With Higher Interest Rates?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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