Will Interest Rate Cuts Save Tesla? Elon Musk Is Counting On It
Stocks soared Thursday after the Federal Reserve cut interest rates by 50 basis points the day before. One of the biggest winners was Tesla (NASDAQ: TSLA).
Shares jumped 7.4% as investors saw the rate cuts as a clear tailwind for the U.S.'s largest electric vehicle (EV) maker. That gain was enough to add $50 billion to its market cap.
While Tesla is still the leader in electric vehicles, the company has had a challenging year. The stock is still down year to date, significantly underperforming both the S&P 500 and its "Magnificent Seven" peers.
Tesla's problems come as sales growth has flatlined and margins are under pressure. The EV industry seems to be going through something of a correction as once-soaring demand for the gas-free cars has plateaued.
However, CEO Elon Musk prefers to blame a different culprit: Interest rates. Time and again, the Tesla chief has gone to great lengths to spell out the challenges that interest rates have presented for potential Tesla buyers.
Image source: Tesla.
Musk's favorite bogeyman
On earnings calls, in media interviews, and in posts on his social media platform, X, Musk has repeatedly complained about the effect of higher interest rates. In early August, he criticized the Fed for not lowering rates at its July meeting, writing in a post on X: "The Fed needs to drop rates. They have been foolish not to have done so already."
Nearly a year ago, Musk spelled out his concerns about rates on Tesla's third-quarter 2023 earnings call, saying:
I am worried about the high-interest rate environment that we're in. I just can't emphasize this enough that the vast majority of people buying a car is about the monthly payment... If interest rates remain high or if they go even higher, it's that much harder for people to buy the car.
With the Fed's 50-basis-point cut and more cuts expected later this year and into next year, Musk seems to be finally getting what he's wanted.
Notably, Tesla stock outperformed essentially all of its peers on Thursday, including struggling EV start-ups that figure to benefit more from lower interest rates since they're more in need of help. Rivian, for example, gained just 1.9% on Thursday, while Lucid actually fell 0.8%.
Traditional automakers also didn't get the Tesla bump. Ford fell 0.6%, and GM closed down 0.1%.
Will rate cuts help Tesla turn around?
Upon closer examination, Musk's complaints about interest rates ring hollow. They seem to be more of a convenient excuse, rather than a meaningful drag on the business.
First, Tesla's exposure to interest rates isn't unique in the auto industry. All automakers face that reality, and higher borrowing costs do raise monthly payments for buyers who use financing. Tesla's vehicles also carry a higher price tag than many of its competitors', meaning its customers are less likely to be sensitive to interest rates since they can afford a more expensive vehicle.
Tesla is also a global company, and less than half of its revenue comes from the U.S., though the U.S. is its biggest market. While rates also rose in places in Europe, those markets shouldn't be affected by the Fed's decisions.
As the chart below shows, there's not much evidence that rising rates had an effect on auto sales. While they're still down from pre-pandemic levels, they actually rose when the Fed was hiking rates and have been steady since. Higher rates didn't dampen the auto market, though they could have prevented it from growing.
US Total Vehicle Sales data by YCharts.
Finally, none of Musk's peers have given the same level of attention to interest rates that he has, making it seem like borrowing costs are more of a scapegoat for Tesla's poor performance, rather than a significant headwind.
What it means for Tesla
Ultimately, interest rate cuts are unlikely to be material to Tesla's long-term performance, despite the stock's surge on Thursday.
What's more important is whether the company can successfully deploy full-self-driving (FSD) technology, and if it can continue to innovate with new products like the anticipated affordably priced Model 2, the robotaxi, and the Optimus autonomous robot.
We'll learn more shortly at the company's Oct. 10 robotaxi event, and when it reports Q3 earnings, due out in a month.
For now, investors are better off focusing on those events, rather than on Tesla's jump on interest rate cuts. Rate cuts aren't necessarily the winning catalyst that Musk seems to think they are.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
