Intel (INTC 2.04%) stock is gaining ground Friday. The company’s share price was up 2.9% as of noon ET, according to data from S&P Global Market Intelligence. Meanwhile, the S&P 500 index was up 1%.
Intel stock is climbing thanks to comments from Federal Reserve chairman Jerome Powell suggesting that the central banking authority will cut interest rates soon. In addition to being a bullish catalyst for the stock market overall, rate cuts would help improve the semiconductor company’s financial health and help support its turnaround plans.
The Fed will likely cut rates next month
This morning, Powell said that “the time has come” for the Federal Reserve to cut interest rates. With signs that the U.S. economy is facing some strains and inflation is moving closer to the bank’s 2% annual goal, the stage seems set for the central bank to cut rates next month.
Lower interest rates typically incentivize companies to spend on growth because borrowing money becomes cheaper, and the relative benefits of simply parking funds in bonds or other low-risk investments are reduced. A similar dynamic exists in the stock market, with low interest rates making investors less risk-averse and more bullish on companies with growth-dependent valuations.
Lower interest rates could be particularly good for Intel
Intel is in the early stages of a massive restructuring effort. In addition to laying off roughly 15% of its global workforce as part of dramatic cost-cutting initiatives, the company also needs to invest heavily to build its chip fabrication business and fund research for new chips that can help it compete against rivals, including Nvidia, Advanced Micro Devices, and Arm Holdings. It’s a difficult balance to strike — and one that’s only being made more difficult by the current high-interest rate environment.
Intel is currently carrying roughly $53 billion in debt on its books. With a rate cut, the company may be able to refinance some of its debt and lower its overall interest expenses. The company’s earnings have already been under pressure lately, and any alleviation on that front would likely help ease the intense bearish sentiment currently surrounding the stock.
Alternatively, lower interest rates would make it cheaper for Intel to borrow money to fund its growth bets. Building its position as a provider of chip fabrication services to third-party designers will be enormously costly. Improving its standing in its core central processing unit (CPU) markets and scoring wins in the data center market won’t be cheap either. Intel has a lot of proving to do with its comeback initiatives, and lower rates will at least make its turnaround a bit a less daunting.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
