Amazon: Profiteer of the Fed's Interest Rate Cut

The stock markets have experienced a surge this year due to the excitement surrounding the potential of Artificial Intelligence (AI) – technology stocks, in particular, drove the S&P 500 up by 20%. However, a significant factor dampened market sentiment: the high-interest rate environment. To curb soaring inflation, the U.S. Federal Reserve (Fed) increased interest rates over the past two years. This step was effective but led to higher borrowing costs for consumers and businesses, reducing their spending and, in turn, limiting companies' growth opportunities. Last month, however, the Fed took a decisive step to improve the situation. The central bank cut interest rates for the first time in four years, and deeper than expected – by 50 basis points instead of the forecasted 25 – and announced plans to cut rates by a further 0.5 percentage points by the end of the year. This is positive news for those affected by the higher interest rates – namely, consumers and businesses. This significant reduction places them back on the path to lower spending. Of course, this will take some time, and further rate cuts are likely necessary to noticeably reduce costs. But the good news is that things are moving in the right direction, which should especially lead to better times for many growth companies. One stock that could become one of the biggest winners from the Fed's rate cut is Amazon. Amazon, a giant in e-commerce and cloud computing, could significantly benefit. The company had been affected by the higher rates in two ways: Many of Amazon's e-commerce customers had less purchasing power, causing them to spend less on non-essential items. Additionally, some clients of its cloud computing business, Amazon Web Services (AWS), cut their project expenditures in light of higher borrowing costs. This particularly impacted younger growth companies reliant on debt for expansion. Amazon also suffered from the problem that the higher interest rates aimed to address: rising inflation. These higher prices burdened the company so much in 2022 that Amazon posted its first net loss in approximately a decade. Now that price increases are under control – thanks to the interest rate hikes – and interest rates are falling again, Amazon's profits and stock price performance could markedly improve. It is worth noting that Amazon made significant changes to its cost structure during the period of rising inflation. These measures helped the company quickly return to profitability. For instance, Amazon worked on efficiency in its logistics network, shifting from a national to a regional model in the U.S. to reduce delivery times and costs. These and other efforts were successful. Last year, Amazon reported a net profit of more than $30 billion, and revenue increased by 12% to more than $574 billion. The cost structure measures should help Amazon maximize profitability in more favorable market phases. In a lower interest rate environment, Amazon could especially benefit, as it allows consumers more leeway to buy not only essentials but also other items they had previously held back on due to budget constraints. The same applies for AWS customers. Projects that were delayed due to high interest rates could now be implemented, leading to revenue growth for AWS. Already, the business has gained momentum, reaching an annual revenue run rate of $105 billion. There is reason to believe that Amazon – a company that suffered from both rising prices and higher interest rates – could be one of the biggest winners in a lower interest rate environment. Of course, this transformation will not happen overnight, as it takes time for rate cuts to impact overall borrowing costs, and additional rate cuts will be necessary to make a significant difference. Nonetheless, there is cause for optimism regarding Amazon's profit growth and stock performance in the long term, which is good news for current Amazon shareholders. Before investing in Amazon stock, consider the following: The analyst team at The Motley Fool Stock Advisor has just identified what they believe to be the top ten stocks for investors to buy right now – and Amazon was not on the list. Those who made the list could reap enormous returns in the coming years. Consider that Nvidia was included on this list on April 15, 2005... if you had invested $1,000 in our recommendation back then, you would now have $744,197! Stock Advisor offers investors an easy-to-follow success plan, including guidance on portfolio building, regular updates from analysts, and two new stock recommendations per month. The Stock Advisor service has outperformed the S&P 500 by more than four times since 2002*. John Mackey, the former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.