These businesses are the ones that will benefit most from lower interest rates. High interest rates for an extended period have led the market in recent years, but signs of easing inflation and payroll data have changed expectations.
According to Piper Sandler, the moderate reading of the consumer price index in July, along with a weaker jobs report and calls for a 50 basis point rate cut in September, led investors to price in "over 90% odds for a rate cut in September and expect more than two cuts by year-end."
The most obvious beneficiaries are small businesses, which have been disproportionately affected by rising borrowing costs. Small businesses are still paying very high rates even on short-term loans, underscoring the pressure they face.
"Small businesses tend to pay high-interest rates and have a lot of debt relative to their size," wrote strategists led by Michael Kantrowitz, adding that interest expenses consume a large share of profits, making them highly sensitive to changes in interest rates.
The ongoing decline in borrowing costs "will be a welcome relief for the small business sector."
But the sensitivity extends beyond small businesses. Stocks with higher debt burdens across all size and style categories are more likely to be affected.
Strategists note that since yields rose in 2022, "high-yielding stocks have continued to outperform," while high-leverage companies lagged behind. The impact has been most pronounced in small businesses, highlighting their vulnerability to rising interest rates and the potential for recovery if yields decline.
