In a boost for the renewable energy sector, market optimism for rate cuts has sent solar and wind energy stocks surging over the past three sessions. The Invesco Solar ETF (TAN) and Global X Solar ETF (RAYS) have recorded significant gains of 17% and 12% respectively since Wednesday, following the Federal Reserve's decision to hold interest rates steady but project three cuts in 2024.

The anticipation of lower interest rates provides a major tailwind for renewable energy stocks heading into 2024, as it will make capital more affordable for investment. According to Morgan Stanley analysts, if rates fall as predicted, clean energy valuations could see a substantial improvement.

Notably, the prices of solar panels, battery storage, and inverters, which have experienced increases in recent years, are also showing signs of deflation in the upcoming period. This means that the overall cost of renewable energy projects is likely to decrease, further bolstering the sector.

However, renewable energy stocks have faced challenges this year due to the impact of high interest rates, which were implemented by the Federal Reserve to curb inflation. The higher rates have made customers hesitant to invest in solar installations, leading to an increase in project costs for companies.

Additionally, the solar energy industry in the United States was hit by a policy change in California that reduced incentives for solar energy production. The state slashed subsidies for owners of rooftop solar panels who contributed excess power to the grid, negatively affecting the sector.

In a positive move for the industry, Morgan Stanley analysts recently upgraded solar panel maker First Solar (FSLR) to Overweight status. They increased their price target for the company from $214 to $237 per share. The analysts cited First Solar's strong risk-adjusted earnings profile and significant backlog, which extends through 2026, as key factors in their decision.

As investors react positively to the prospect of interest rate cuts and the potential for improved clean energy valuations, renewable energy stocks are poised to experience further growth. The ongoing deflation of prices for solar panels and associated equipment also bodes well for the sector's expansion in the coming years.