This stock will be one of the biggest winners from the Fed's rate cut

Stocks have risen this year, buoyed by excitement about the potential of artificial intelligence (AI) – technology stocks have soared, helping this S&P 500 have so far recorded an increase of 20%. But one major problem has weighed on market sentiment: the high interest rate environment. The Federal Reserve has raised interest rates over the past two years to curb runaway inflation. The efforts had an impact, but resulted in higher borrowing costs for consumers and businesses, hurting their ability to spend and also hurting companies' ability to expand.

However, last month the Fed took an important step to change the situation. The central bank cut interest rates for the first time in four years, by a deeper-than-expected cut – 50 basis points instead of 25 – and indicated it would cut rates by another half point by the end of the year.

This is positive news for those affected by higher interest rates – consumers and businesses, as I mentioned earlier – as it puts them on the path to lower spending. Of course, it will take time for this to happen and further tariff cuts will likely be required to significantly reduce costs. But the good news is that things are moving in the right direction, and this should lead to better days for most growth companies. And my prediction is that one stock in particular will be one of the biggest winners from the Fed's rate cut.

A player that serves consumers and businesses

This player serves both consumers and businesses and relies on the purchasing power of both. It is a giant in the high-growth e-commerce and cloud computing businesses. The stock I'm talking about is Amazon (NASDAQ:AMZN).

This trillion-dollar company suffered from higher interest rates in two ways: Many of Amazon's e-commerce customers saw their purchasing power decline, meaning they were able to spend less on non-essential items. And certain customers of the company's cloud computing business, Amazon Web Services (AWS), may have cut spending on projects as borrowing costs have skyrocketed. This is particularly the case with younger growth companies that rely on taking on debt to expand.

This market giant also suffered from the problem that higher interest rates were supposed to solve: rising inflation. In fact, these higher prices weighed on Amazon so much that the company reported its first net loss in about a decade in 2022.

However, now that prices are under control thanks to tariff increases and tariffs are now falling, Amazon's earnings and stock performance could benefit greatly. It's important to remember that Amazon made major changes to its cost structure during the period of rising inflation, moves that helped the company quickly return to profitability.

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For example, Amazon worked to improve the efficiency of its entire fulfillment network, switching from a national model to a regional model in the US to reduce delivery times and costs. These and other efforts have worked. Last year, Amazon reported net income of over $30 billion and revenue rose 12% to over $574 billion.

A low interest rate environment

And the cost structure measures should help Amazon maximize profitability during better market times. This brings me to today and the coming months, against a backdrop of lower interest rates. Amazon should benefit from this because the company is a leader in e-commerce. And as consumers have more money to spend, they're likely to turn to Amazon not just for essentials, but also for other items they didn't want to buy because of their limited budgets.

The same applies to AWS customers. Those that have held off on launching new projects may make a move as interest rates fall – and this should lead to revenue growth for AWS. From the looks of it, the company has been gaining momentum and recently hit $105 billion in annual revenue.

So my prediction is that Amazon – a company that has suffered from both rising prices and higher interest rates – could be one of the biggest winners in a new, lower interest rate environment. As I said, this won't happen overnight as it takes time for interest rate changes to impact the overall cost of borrowing and additional rate cuts will be needed to make a big difference. But there is reason to be optimistic about Amazon's long-term earnings growth and stock performance, and that's great news for Amazon shareholders today.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adria Cimino holds positions at Amazon. The Motley Fool has positions on Amazon and recommends them. The Motley Fool has a disclosure policy.

Prediction: This Stock Will Be One of the Biggest Winners from the Fed's Rate Cut was originally published by The Motley Fool