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The stock market sighed with relief at the latest consumer price index (CPI) report released by the Labor Department on Wednesday. Instead of rising, the CPI stayed flat from the 0.3% uptick in April. Against the core estimates (without food/energy) of 3.5% annually and 0.3% monthly, core CPI for May was 3.4% and 0.2%, respectively. 

Including food and energy, this puts the annual inflation at 3.3%, helped by the slight 0.1% reduction in food costs and 2% decline in energy costs. Although this still means that inflation is increasing at 3.3% annual rate, the acceleration is not ramping up further. 

In turn, this gives the Federal Reserve more space to cut rates. Given that the shelter index rose by 0.4% in May, the central bank could suppress it by cutting rates, which would lower mortgage rates. Moody’s Chief Economist Mark Zandi believes that the Fed already achieved its objectives when looking at the whole macro picture.

The Fed should already be cutting rates, according to @Moodys Chief Economist @MarkZandi.

“To me they’ve achieved their objective. And if you’ve done that, you have to ask yourself the question why we need such a high rate,” he tells @SaraEisen & @CarlQuintanilla. pic.twitter.com/iI3DyrpX66

— Squawk on the Street (@SquawkStreet) June 10, 2024

For now, fed fund futures priced in the first rate cut for September by 0.25%, at 82.56% probability based on the CME FedWatch Tool. After today’s FOMC meeting, the tone and message will further paint a clearer picture.

Investors should prepare their portfolios in loosened financial conditions by considering these stocks.

Tesla (Nasdaq: TSLA)

Like many high-growth stocks, Elon Musk’s Tesla took a tumble since its all-time high of $409 in November 2021. Pressed by aggressive price cuts from Chinese automakers, the Fed’s hiking cycle starting in March 2022 only worsened the company’s tight margins.

The sustained hiking pressure made it more difficult to fund expenses cheaply, eventually leading to Tesla’s layoffs. Likewise, it doesn’t help the automaker’s bottom line that consumers have less disposable income as they need to serve higher debt loads.

However, with the easement on the horizon, Tesla is still in a position of strength, dominating pure EV markets in the US and EU. Ahead of robotaxis reveal in August, and the new entry Model 2 at $25,000 price tag set for 2025 release, TSLA shareholders should see a series of rallies.

Even Tesla’s Optimus robot has become more concrete, with a price tag between $25,000 and $30,000. Is now a good time to make a TSLA entry? At a price of $178, TSLA shares are still far from the 52-week average of $219.62. Over the last three months, the stock has been moving sideways, dropping by only 0.7%, suggesting a stable starting point before another rally. 

Essential Utilities, Inc. (Nasdaq: WTRG)

Utility stocks can be used to gauge the macro environment. Against inflation, they can adjust by offloading costs to consumers who need essential services. Because of that need, utility stocks have stable revenue sources that translate into regular dividend payouts. 

Moreover, if the Fed missed the mark by paving the road to recession, utilities’ predictable cash flows act as a foil. Providing water and natural gas services throughout the country, Pennsylvanian Essential Utilities has been investing $4 billion since 2020 to overhaul aging infrastructure.

With a new investment program of $1.4 billion through 2028, the company is ensuring its operating margins go up as less maintenance is needed on costly repairs and labor. In the last Q1 earnings reported in May, Essential Utilities delivered $265.8 million net income, a significant uptick from $191.4 million in the year-ago quarter.

The company offers a 3.32% dividend yield to shareholders at an annual payout of $1.2284 per share. In the last three months, WTRG stock is up 4% to the present price of $37.42, aligning with its 52-week average of $36.90 per share. Nasdaq’s forecast twelve months ahead puts the average WTRG price target at $42.5 per share.

Advanced Micro Devices (Nasdaq: AMD)

It has been no secret that many investors have come to see Nvidia (NVDA) stock as a hedge against inflation, in addition to exposure to generative AI infrastructure. However, with that pressure easing, AMD’s performance is likely to see a boost as the second fiddle to Nvidia. 

If debt load on consumers is significantly reduced via rate cuts throughout the year, they are even more likely to boost AMD’s bottom line. After all, the company caters to the budget-friendly segment across the board, from CPUs/APUs to GPUs.

At the present price point of $161, AMD shares are 16% above the 52-week average of $138.14. Nasdaq’s forecasting paints a significant upside for the average AMD price target at $191.93 per share. 

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