When interest rates start to drop, it’s like the stock market gets a shot of adrenaline. Historically, the stock market has tended to perform well during periods of rate cuts. On average, in the six months following a rate cut, the S&P 500 has seen gains of around 8-10%. This isn’t too surprising, as lower rates generally make borrowing cheaper, which can spur business investments and consumer spending. This ultimately boosts corporate profits and, by extension, stock prices. Plus, with lower returns on bonds, investors often turn to stocks for better yields, driving prices up even further.
But it’s not always a straight line up. The market can sometimes experience volatility in the short term as investors digest the reasons behind the rate cuts, like economic slowdowns or financial uncertainty. However, over the longer term, rate cuts have often been a signal of good things to come for equities. For example, during the rate-cutting cycles in the early 2000s and again after the 2008 financial crisis, the market eventually rallied as the economy regained its footing. So, while the immediate aftermath of a rate cut can be a bit of a rollercoaster, history suggests that patient investors may be rewarded with solid returns as the dust settles.
Aritzia could fare well
Aritzia (TSX:ATZ) on the TSX stands to gain significantly from continued rate cuts, and this is a story that begins with consumer behaviour. When interest rates drop, borrowing becomes cheaper, which often leads to increased consumer spending in the retail sector. Aritzia, with its unique positioning as a purveyor of “Everyday Luxury,” is perfectly poised to capture a larger share of this expanded consumer budget. As rates decrease, shoppers are more likely to indulge in discretionary spending. Aritzia’s stylish, high-quality offerings are exactly the kind of purchases that benefit from this trend. This could lead to a further boost in the company’s already impressive revenue growth, which saw a 7.8% increase in the first quarter (Q1) of 2025.
Moreover, Aritzia’s strategic expansion plans are likely to benefit from lower borrowing costs. The company has been aggressively expanding its footprint, particularly in the United States, where net revenue increased by 13% in the most recent quarter. With more rate cuts on the horizon, Aritzia can finance new store openings and boutique repositioning at a lower cost. This makes its expansion more affordable and potentially more profitable. This is particularly important as the company plans to grow its square footage by 50% in the U.S. alone, a move that could significantly enhance its market presence and drive revenue growth.
Better financing
In addition to supporting expansion, lower interest rates can also help Aritzia manage its existing debt more efficiently. The company’s debt-to-equity ratio is currently around 97%, and with total debt at $814.63 million, cheaper financing options can ease the burden of interest payments. This could improve Aritzia’s profitability, allowing more of its earnings to be reinvested into the business or returned to shareholders. The resulting financial flexibility would enable Aritzia to continue investing in its digital and in-store experiences, maintaining its competitive edge in a rapidly evolving retail landscape.
Another aspect to consider is the potential impact on Aritzia’s stock performance. Lower interest rates generally make equities more attractive relative to fixed-income investments, which could lead to increased demand for Aritzia shares. The company’s stock has already performed well, with a 52-week change of 84.55%. Continued rate cuts could attract more investors looking for growth opportunities in the retail sector. This increased investor interest could further drive up Aritzia’s stock price, adding value for current shareholders.
Bottom line
Aritzia’s strong operational performance, combined with the tailwinds from rate cuts, sets the stage for continued success. The company’s gross profit margin increased by 510 basis points in Q1 2025, and its adjusted earnings before interest, taxes, depreciation and amortization soared by 70.6%. These are both indicators of efficient management and strong demand for its products. As the economic environment becomes more favourable due to lower interest rates, Aritzia is well-equipped to capitalize on these trends. It will leverage its brand strength, expansion strategy, and financial acumen to deliver sustained growth. For investors looking at the TSX, Aritzia presents a compelling case as a retail stock that’s not just surviving but thriving in a low-rate environment.
