2 Stocks That Could Rocket on a Fed Rate Cut

Key Points

• Rate cuts typically boost housing activity and property demand, lifting any real-estate related stock.
• Zillow stands out as it's riding a three-year uptrend, with fresh analyst targets pointing to an additional 20% upside.
• CoStar also has strong fundamentals and a new Outperform rating with double-digit growth forecasts.

Unless you've been under a rock, you'll have heard that markets are increasingly expecting the Federal Reserve to begin cutting rates before the end of the year. After a long period of tight monetary policy, softening inflation and signs of slowing growth are giving policymakers more room to ease. For equities, that shift is typically bullish, as cheaper financing stimulates both corporate activity and consumer demand.

Few areas benefit more directly than real estate. Lower mortgage rates tend to pull buyers back into the housing market, while commercial leasing activity also accelerates as borrowing costs fall. For investors, this makes real estate-focused stocks especially sensitive to rate decisions. And with the next easing cycle approaching, here are two of the top stocks to be thinking about. 

Zillow: A Proven Rate-Cut Winner

Zillow Group Inc NASDAQ: ZG operates one of the best-known residential real estate platforms in the U.S., earning revenue through advertising, rental listings, and mortgage origination services. The company has been in a solid uptrend for nearly three years now and is up 40% since April alone, bringing it close to multi-year highs.

That strength comes despite the company issuing softer forward guidance in its Q2 report last month. Investors appear to be looking past that toward the prospect of rate cuts, remembering just how aggressively Zillow can rally in a supportive environment. During the COVID-era easing cycle, for example, of 2020 and 2021, shares surged more than 900%, a reminder of how sensitive the business model is to housing activity.

Analysts are leaning bullish as a result. The teams at both Evercore ISI and KeyCorp reiterated their Overweight ratings in August and set price targets that ranged as high as $95. From the $80 that Zillow closed at on Thursday evening, that implies nearly 20% in targeted upside. 

Still, it's worth noting that not everyone is convinced. Canaccord Genuity rated Zillow a Hold last month, preferring a wait-and-see stance until the Fed actually cuts. That cautious approach will resonate with more conservative investors, who may be kept on the fence due to the company's slim profitability.

However, the bigger story is the sustained upside Zillow has proven it can generate over multiple quarters if the real estate cycle turns in its favor.

CoStar: Positioned for Growth

CoStar Group Inc NASDAQ: CSGP operates on the commercial side of the property market, generating revenue through its suite of online marketplaces such as Apartments.com, LoopNet, and Homes.com. Compared with Zillow, CoStar's stock has rallied less aggressively since April, perhaps as investors grow wary of its frothy valuation and price-to-earnings ratio of almost 350. 

However, it also remains well-positioned to benefit from a rate-cut environment. Like Zillow, its last easing cycle performance was impressive, reflecting just how quickly falling rates can expand transaction activity across its platforms.

Fundamentally, CoStar is coming off a string of quarters where it topped analyst expectations. That momentum has left it in prime shape to capitalize if rate cuts start to materialize. The stock trades just under $90, and expectations continue improving. Earlier this month, Wolfe Research initiated coverage with an Outperform rating and a fresh $105 price target, pointing to about 15% upside from current levels.

The Wolfe Research team cited Homes.com's potential as a growth driver, Apartments.com's continued strength, and LoopNet's steady performance and the flagship CoStar Suite's steady performance. Together, these businesses are expected to deliver consistent top-line growth in the low double digits to low teens over the medium term, which will only be amplified if, if not when, the Fed cuts rates. 

September’s Outlook Centers on Fed Rate Cut Expectations

Looking ahead, market confidence in a cut sometime this month is high. John Williams of the New York Fed suggested this week that tariffs haven't had much of an effect on inflation, the concern of which has been one of the key obstacles to easing. With labor markets also showing signs of cooling and price pressures easing, a modest rate cut, at the very least, is now widely anticipated at the next Fed meeting around the middle of the month. 

For real estate-linked stocks like Zillow and CoStar, that means a fast-approaching catalyst. Lower borrowing costs would reignite housing and commercial activity, while investor appetite for rate-sensitive stock sectors ramps up. Both companies already boast strong execution and analyst backing.

With the macro backdrop turning more supportive, their potential for new and sustained rallies is compelling.