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

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One important facet of investing is the ability to react to market changes quickly, accurately, and with confidence. Analyzing financial reports and keeping up with market news are two important steps to achieving this. Knowing which metrics are significant for a company, as well as their historical performance, will provide a much clearer picture of their current situation and future prospects.

As interest rates drop, it is likely that investors will shift their money from lower risk investments like bonds, to higher risk assets like stocks. With that in mind, some sectors stand to benefit more from lower interest rates than others.

In the consumer discretionary sector, companies that carry higher levels of debt on their balance sheets are likely to see a boost in earnings as a result of reduced interest expenses. Abercrombie & Fitch (ANF) is a prime example, with its 73% debt to equity ratio. Analysts at Jefferies Financial Group predict that the stock could reach as high as $220 a share, thanks in part to a 14.5% increase in EPS by 2025.

Similarly, Chewy Inc. (CHWY), also in the consumer discretionary sector, could benefit from the current low interest rate environment. With a smaller market capitalization and a high debt to equity ratio, the company could see a significant increase in EPS, potentially leading to a 16.3% upside on the stock's current price.

Real estate investment trusts (REITs) are another sector that could see growth from lower interest rates. Healthpeak Properties Inc. (DOC) stands out, thanks to its strong position in the healthcare sector, a stable source of rental income, and its 5.3% dividend yield. Analysts at Evercore see a potential upside of 15% on the stock's current price, with EPS expected to reach $0.44 a share in the next 12 months, up from today's $0.21 a share.

Overall, while it is difficult to predict how the market will react to lower interest rates, there are certain sectors that appear poised for growth. By analyzing financial data, research, and market news, investors can make informed decisions and capitalize on these opportunities.