Interest rates determine the risk and reward perceptions of virtually all asset classes in the financial market. The benchmark for return is—and has always been—the United States ten-year treasury bond yield, so when bond yields are high, investors tend to avoid higher-risk assets like stocks, as the risk is not worth it compared to bond yields.

Now that the Federal Reserve (the Fed) has lowered interest rates by the most since 2007, investors may think that lower returns could be ahead, especially now that the S&P 500 has priced in most—if not all—of the potential effects these interest rate cuts have on the economy. Understanding that new money will shift into different market areas is key. Still, it all begins with knowing what interest rates will do in the coming quarters.

Sectors that typically have higher debts on their balance sheets are poised to benefit from lower interest rates. Lower interest expenses on that debt would drive up net income and earnings per share (EPS). For this reason, investors can find higher returns in sectors like consumer discretionary and the real estate sector.

Top Consumer Discretionary Stocks Poised for Higher Growth Ahead

This is one sector that could benefit from a double tailwind as interest rates work their way through the economy. Still, not all consumer discretionary stocks are made equal. This is going to be the case, especially for those with a smaller market capitalization and higher debt.

Analysts Expect Abercrombie’s EPS to Jump 14.5% by 2025

Fitting this list, investors can see stocks like Abercrombie & Fitch Co. (NYSE: ANF), with its $7.3 billion market capitalization today, carrying over 73% debt to equity on its balance sheet. This makes the company a prime target for an EPS expansion name, as lower interest rates help both consumer trends and lower interest expenses.

Wall Street knows this is the case, as analysts at Jefferies Financial Group see up to $220 as a price target for the company, calling for a net upside of 53.3% from where the stock trades today. More than that, Wall Street analysts expect to see EPS of $2.86 for the end of 2025, a jump of 14.5% from today's EPS of $2.5 in Abercrombie & Fitch.

This growth in EPS and the higher valuation are driven by both the company's small size and the potential earnings expansion that can come from lowering interest expenses to push EPS higher to a point where current forecasts might be on the conservative side.

Chewy’s Debt and Size Make It a Prime Target for Future Gains

Another name that is worth mentioning for a potential buy in this trend is Chewy Inc. (NYSE: CHWY) as a part of the consumer discretionary space with a healthy mix of consumer staples in the way that pet owners will always have room in their budgets to take care of their pets' needs.

Because the company is only $12.6 billion in size and carries over 100% in debt compared to equity, it makes for a nearly perfect buy target in the coming quarters. This is why analysts at Piper Sandler see a price target on the stock of up to $35 a share, calling for a net upside potential of 16.3% from where it trades today.

More than that, bearish traders decided to trim their views on Chewy stock, as the short interest has declined by 2% over the past month alone to show capitulation from the bearish side of the market and opening room for bulls to take their places instead.

Among these bulls were Truist Financial and B. Riley Wealth Advisors, who boosted their holdings in Chewy stock by 39.3% and 74% as of August 2024. This would bring their net investments up to $2.5 million and $565,000 today.

Real Estate Stocks Poised for Growth Ahead of the Market

Healthpeak's Dividend and Growth Potential Make It a Standout REIT

Real estate stocks fit this same category. Because they need to acquire property and boost rental income, stocks like Healthpeak Properties Inc. (NYSE: DOC) shine. This $15.9 billion real estate investment trust (REIT) operates in the healthcare sector, an underrated growth source in the U.S. economy.

Wall Street analysts know that lower interest rates can help this company acquire more property and boost its bottom-line earnings, so Evercore decided to raise its price target to $26 a share for Healthpeak Properties. To prove these targets right, the stock must rally by as much as 15% from where it trades today.

Wall Street's earnings per share (EPS) forecasts are set at $0.44 a share for the next 12 months, up from today's $0.21 a share for a net 109.5% growth rate. This comes on top of one of the main benefits of investing in REITs: the dividend payout.

Healthpeak Properties offers a $1.2 payout for an annualized dividend yield of up to 5.3% to beat inflation and cushion any volatility that lower rates might bring into the market.