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A rate cut doesn't help everyone equally — why growth stocks, real estate, and highly leveraged companies react more than others.
A DCF model discounts future earnings back to today's value using a discount rate partly based on the risk-free rate. When rates fall, the discount rate falls, and every dollar of future earnings is worth more in today's terms. This effect is stronger the further out those earnings sit — which is why growth companies, whose value mostly comes from distant future earnings rather than current profit, benefit disproportionately from falling rates.
Companies that finance themselves with significant debt (leveraged real estate, infrastructure, parts of heavy industry) benefit directly: their cost of financing drops, improving net income without any change to the underlying business.
As bond yields fall, stocks with steady, high dividends become relatively more attractive — they start being treated as a partial substitute for bonds by investors seeking income, which can support demand for those stocks even without any change in their profitability.
Banks are the most common example: part of their profitability comes from the spread between what they charge on loans and pay on deposits (net interest margin), and low rates can compress that spread. Worth remembering: this isn't an automatic formula — rates falling because of an economic slowdown (rather than successful inflation control) can hurt banks a different way — rising borrower defaults.
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This research is intended for general educational purposes only, does not constitute investment advice, and is not a prediction. Full details on the disclaimer page.