The outlook becomes clearer as we enter the second half of the year. The first half was all about the hopes of interest rate cuts. While the Bank of Canada initiated the rate cut in June, the U.S. Fed is holding back. But rate cuts are coming in these next six months. Even if it’s just a 25-basis point cut, there is assurance that debt can’t get worse from this point. Standing at the cusp of this turnaround, which is a better buy: passive income plays or growth stocks?
Passive income play or growth
On the one hand, prolonged high interest rates could slow the recovery of high-leverage dividend stocks as they have to cope with interest payments. On the other hand, growth stocks are ready to scale and meet consumer demand. They generally have lower debt than dividend stocks.
A falling interest rate will bode well for growth stocks as they could see an improvement in business activity and consumer demand ahead of the holiday season. Moreover, a fall in interest rates shifts investors’ attention from term deposits to the stock market in search of inflation-adjusted returns.
In fact, some growth stocks are beginning to see a rally. Within growth stocks, tech stocks would be a good buy as they don’t have high leverage.
If you remember the 2022 tech stock meltdown, the tech stocks fell ahead of dividend stocks on the news of an interest rate hike. The tech stocks are likely to recover before dividend stocks as well. While you still have time to continue your passive income play, July is the time for growth stocks.
Which growth stocks are a better buy in July?
Shopify (TSX: SHOP) stock is likely to see a seasonal run in November and December as the holiday shopping begins. Its share price has already surged 15% in June as the Bank of Canada’s interest rate cut revived hopes of a strong holiday season. It was not affected by the U.S. Fed keeping the rate unchanged. I am optimistic about the rally as its earnings growth could benefit from a lower base year.
Shopify’s previous year’s earnings took a hit as it sold its logistics business in June 2023 and returned to an asset-light model. An interest rate cut and relatively lower inflation than the 2023 holiday season could boost its revenue growth this year.
Advanced Micro Devices (NASDAQ: AMD) is another growth stock you might want to grab and hold on to. The chipmaker had a tough time beating Nvidia in the artificial intelligence (AI) game. However, its MI300X chip is catching up to Nvidia’s H200 chip. AMD will also benefit from the PC refresh cycle and industrial automation. The Black Friday sale could also have good revenue numbers from the PC and embedded segments.
Now is the time to buy shares of AMD as they trade 22% below their March peak. AMD surpassed its 2021 tech bubble peak in 2024 and can even surpass its $210 peak. It is riding the AI wave and is the only strong competitor to Nvidia and Intel. The next 10 years could bring a remarkable shift to AMD’s business segments. Embedded and data centres could drive growth, while the client and gaming segment could continue to generate good profits.
Turnaround growth stocks
While the above two stocks have a higher probability of generating returns, you could also invest a small portion in turnaround stocks like Magna International (TSX: MG), which is trading at its multi-year low. The worst is over for Magna and it has almost bottomed out. It is waiting for economic recovery and the cyclical demand to revive. The auto parts manufacturer used the cyclical downturn to build capacity and improve efficiency through restructuring.
Magna is waiting for electric vehicle sales to gather momentum. Grabbing this stock at its lowest could give you big wins at the inflection point.
