Forthcoming Rate Cuts: Why We're Watching RMBS

On August 21, we finally got wind of what was said at the most recent Fed meeting in July. 

To put it mildly, the market reacted positively.

According to the records released on Wednesday, the “majority” of attendees “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.” In other words, should economic data, like inflation and job numbers, continue to soften, we could see an interest rate cut as early as next month. 

Image: U.S. Fed Funds interest rate (source: Trading Economics)

Market Reaction

All major markets closed higher on Wednesday following the Fed’s news. After all, Wall Street typically views a cut to interest rates favorably. 

• Dow: up 0.14%
• S&P 500: up 0.42%
• Nasdaq: up 0.57%

Lower rates mean cheaper borrowing. Cheaper borrowing means businesses, like those listed on major exchanges, are more incentivized to borrow cash to invest in growth, ostensibly resulting in superior business metrics and, ultimately, higher stock prices. 

Image: Close of day return August 21 for the Philadelphia Semiconductor Index (SOX) (Source: TradingView)

News of the rate cut didn’t impact all stocks equally. The semiconductor space saw one of the bigger one-day jumps, with the Philadelphia Semiconductor Index rising over 3% on the day. This makes sense since high R&D industries, like the chips space, need substantial capital for investment. When borrowing is cheap, these companies can more easily invest in growth.

What’s Next

Rate cuts, or the anticipation of rate cuts, will likely continue being a bullish force in the semiconductor space, at least in the near term. To gain exposure to this exciting, albeit volatile, sector, check out our list of the Best Semiconductor Stocks to Buy Now. One name that’s on our watchlist? Rambus Inc. (NASDAQ: RMBS). Here’s why:

• Strong fundamentals: According to our due diligence checks, Rambus has exceptional fundamentals. With a Zen Score of 61, nearly double the industry average of 31, Rambus passed 19 of 33 of our due diligence checks, with particularly high scores in the Valuation and Financials categories (See all of our due diligence checks here).
• Strong Buy consensus: All three analysts that cover RMBS on WallStreetZen rate the stock a Strong Buy.
• High 1-year forecasts: At the low end of the 12-month forecast, analyst Mehdi Hosseini of Susquehanna predicts a nearly 45% price appreciation. At the upper end, Kevin Cassidy of Rosenblatt expects the name to surge almost 87% (See all 1-year forecasts here).

The Bottom Line 

The anticipation of a potential rate cut by the Fed is boosting market optimism, as seen in the recent positive movement across major indices. A cut in interest rates could provide much-needed relief to R&D-heavy industries like semiconductors, enabling companies to invest more readily in growth and innovation. Investors looking to capitalize may want to explore the semiconductor sector, where companies like Rambus Inc. are currently compelling watches.

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