In a high-interest environment, the Federal Reserve (Fed) has raised interest rates at the fastest pace in history between 2022 and 2023. However, with signs of weakness in the US labor market, the market expects the Fed to cut interest rates later this year to stimulate the economy. If interest rates start to fall, there are four sectors that may benefit.

REITs

The sharp rise in interest rates over the past two years has hit real estate investment trusts (REITs) hard. REITs rely on debt to fund operations and acquisitions, and rising interest rates have led to a sharp increase in their financial costs, thereby compressing distributable income.

For example, Mapletree Pan Asia Commercial Trust (SGX: N2IU)'s financial costs in the first quarter of fiscal year 2025 increased by 9.8% year-on-year to S$59.4 million, while net property income only increased slightly by 0.1% year-on-year.

Similarly, OUE REIT (SGX: TS0U)'s financial costs in the first half of 2024 increased by 18.5% year-on-year, while net property income only increased by 1.6%.

0 If interest rates fall, REITs' financial costs are expected to ease, although those holding large amounts of fixed-rate debt may need more time to lock in lower rates as loan restructuring takes time.

Consumer Discretionary

If interest rates fall, consumers will spend less on interest on loans and mortgages, increasing disposable income and consumer confidence is expected to improve. Lower interest rates will enable businesses to expand operations and accelerate growth, further stimulating the economy and bringing about a wealth effect. When consumers feel wealthier, they tend to spend more on luxury goods.

For example, companies such as The Hour Glass (SGX: AGS), Ralph Lauren (NYSE: RL) and Prada (HKSE: 1913) are expected to benefit from the increase in demand for luxury goods.

Consumer Staples

The increase in disposable income will also have a spillover effect on the consumer staples industry. As interest rates fall, people will be more able to afford daily necessities and will no longer cut back on spending as much as before.

This trend will benefit supermarket operators Sheng Siong (SGX: OV8) and DFI Retail Group (SGX: D01). Meanwhile, companies that sell daily consumer goods and food, such as Mondelez (NASDAQ: MDLZ), Kimberly-Clark (NYSE: KMB), Procter & Gamble (NYSE: PG) and Kraft Heinz (NASDAQ: KHC), will also benefit.

In Singapore, companies such as Delfi (SGX: P34) and Fraser & Neave (SGX: F99) should also benefit from the increased demand for food and beverages brought about by lower interest rates, such as chocolate, snacks and fresh milk.

Technology Sector

The technology sector is another sector that investors should pay attention to. Generative artificial intelligence (AI) has attracted a lot of attention, and many technology companies are racing to launch the latest products and services to stay competitive. Technology companies need to invest heavily in R&D to secure their position in the market, while capital expenditures will also remain high to acquire the latest hardware and design software through internal teams. If interest rates fall, these companies will benefit from lower financial costs.

NVIDIA (NASDAQ: NVDA), the leader in the graphics processing unit (GPU) market, is currently working on multiple areas, including 3D deep learning, applied research, computer vision, and robotics. The company plans to launch the new Blackwell chip in 2025, although there are reports that shipments may be delayed due to design flaws.

Meta (NASDAQ: META), Alphabet (NASDAQ: GOOGL), and Microsoft (NASDAQ: MSFT) are all relying on this new chip to drive their latest applications and generative AI models. In addition, Apple (NASDAQ: AAPL) should also benefit from lower interest rates, which is expected to increase demand for its products both from a capital expenditure perspective and from a consumer demand perspective.