Rocket Companies Inc. (RKT) shares traded higher Tuesday, and the reason tells you everything about how mortgage lenders think about the Federal Reserve. When rate cut odds spike, these stocks move.

The Fed Pivot That's Turning Heads

Following dovish commentary from Fed Governor Christopher Waller regarding labor market softness, traders have recalibrated their expectations in a big way. They're now pricing in an 81% probability of a December rate cut, and that's creating a backdrop that works beautifully for Rocket's business model.

Here's why a rate cut matters more for Rocket than you might think. First, it directly lowers the company's cost of funding, which improves the spreads on loans they hold before selling them into the secondary market. That's the boring but important part.

Volume Is Where Things Get Interesting

Second, rate cuts act as a catalyst for Net Rate Lock Volume, which measures committed mortgage applications. Rocket reported this figure rose 20% year-over-year to $35.8 billion in the third quarter. A December cut would likely unfreeze fence-sitters who've been considering buying a home but waiting for better rates. More volume flows into Rocket's scalable platform, and because of operating leverage, incremental volume significantly boosts profitability.

But the real magic happens in refinancing. Rate cuts reignite the refinancing channel, and this is where mortgage lenders make their best money. Refinancing loans typically carry higher margins and lower acquisition costs than purchase loans. You're not hunting for new customers through expensive marketing campaigns; they're already in your system.

The MSR Portfolio Puzzle

Now, there's a complication here. Lower rates can actually decrease the value of Rocket's massive $613 billion Mortgage Servicing Rights portfolio because of prepayment risk. When rates drop, people refinance, and those servicing rights lose value.

But Rocket has built technology specifically designed to turn this risk into revenue. Their recapture strategy aggressively transitions existing customers in their servicing portfolio into new loans, generating fresh origination fees that far outweigh the degradation in MSR value. They're essentially eating their own lunch before someone else can.

Combined with their recent Redfin partnership momentum, a cheaper rate environment validates Rocket's volume-centric strategy. The company is built to benefit when money gets cheaper and people start moving again.

What the Numbers Show

Market data underscores this bullish price action. MarketDash currently assigns Rocket Companies a robust Momentum score of 83.57, reflecting strong recent performance relative to the broader market.

Shares closed Tuesday up 8.44% at $19.66. That's a meaningful one-day move, and it reflects how quickly sentiment can shift when the Fed's direction becomes clearer. For a company whose entire business model depends on the cost and availability of credit, Tuesday's price action makes perfect sense.

The mortgage industry lives and dies by interest rates, and right now, the rates story is turning in Rocket's favor. Whether that translates into sustained outperformance depends on whether the Fed actually delivers that December cut and what happens to housing demand in response. But for now, investors are betting that cheaper money means better times ahead for mortgage originators.