Interest rates have been on the decline thus far in 2025. Most investors are aware that the Bank of Canada has been among the most aggressive of the G7 central banks in cutting rates, as the Canadian economy has slowed more considerably than many of its peers due to the importance of the housing sector on overall domestic economic activity.
However, as the Bank of Canada continues to cut rates and signals that more rate cuts could be on the horizon, Canadian investors may want to think differently about their potential investing options. In this article, I’m going to highlight two very different businesses (one growth stock and one dividend-paying bank stock) that may benefit in different ways from future interest rate cuts.
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Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD) is among the largest financial institutions in Canada, and is actually a bank with a strong presence in the U.S. market as well. This is the Canadian bank most investors looking for exposure to the U.S. market may gravitate toward, as the simple reality is that TD’s footprint south of the border is larger than it is in Canada.
The company’s core lending business certainly took a hit following the various Bank of Canada interest rate hikes over the past two years. Interest rate increases did what they were supposed to do, slowed down economic activity. For banks like TD that rely on continued growth to see underlying earnings growth, that’s not a good thing.
However, with lower interest rates comes the prospect of greater long-term growth in loan demand, as well as improved credit metrics for borrowers, many of whom have become increasingly indebted of late. Canadian household debt is among the highest in the G7, and this is presenting a problem for the system at this point.
I think TD’s status as one of the most efficient and innovative banks should position investors well to manage through any economic backdrop moving forward. The company has maintained profitability during previous hiking and cutting cycles, and I think this will be another one of those cycles to invest around. If we do see a significant drop moving forward, TD is a company I’d consider adding.
Shopify
The leading e-commerce platform provider in Canada (and in many parts of the world as well), Shopify (TSX:SHOP) is certainly worth considering as a potential rate cut beneficiary, for very different reasons than TD Bank. Yield curves and net interest margins aren’t the story here. Rather, it’s about how investors intrinsically value stocks, and how multiples are applied to higher-growth businesses overall.
Indeed, during the rock-bottom interest rate environment of the pandemic, Shopify’s valuation absolutely skyrocketed. When there’s really no alternative in which to invest one’s capital (outside of stocks) for a reasonable return, companies like Shopify look like a decent value at multiples that may otherwise seem daunting.
Of course, interest rate increases change that narrative, with stocks like Shopify beginning to look expensive and investors looking to rotate toward growth stocks with better perceived value.
I’m of the view that as discount rates decrease, valuations for companies like Shopify should get a boost. In this sort of environment, a barbell approach with more value-oriented rate cut beneficiaries and higher-growth companies that could see valuation premium surges could be the way to go.
