Tesla Inc. (TSLA) shares took a downturn on Friday, shedding 1.91% to $239.38, erasing the gains they made during Thursday’s trading session. This reversal came amidst a broader market weakness and the unexpected 50-basis-point interest rate cut by the Federal Reserve this week. The decline suggests that investors are now factoring in concerns about economic growth and the potential impact on demand for Tesla’s electric vehicles.
Initially, Tesla stock rallied on Thursday following the Federal Reserve’s decision to slash interest rates by 50 basis points at the September Federal Open Market Committee (FOMC) meeting. This aggressive move, reducing the federal funds rate to a range of 4.75% to 5%, was welcomed by growth-oriented companies like Tesla, as it meant lower borrowing costs. The Fed’s updated Dot Plot, indicating the possibility of further rate cuts in 2024 and 2025, fueled optimism that cheaper financing would boost demand for capital-intensive goods, including electric vehicles. Lower interest rates typically make it easier for consumers to finance major purchases like cars, further driving demand for Tesla’s products.
However, as investors digested the broader implications of the Fed’s projections, the initial optimism about the rate cut faded, leading to Tesla’s share decline on Friday. Several factors contributed to this shift:
*
Weaker Economic Growth Outlook:
The Federal Reserve revised its GDP growth forecast for 2024 downward, from 2.1% to 2.0%, signaling a slowdown in economic activity. This is concerning for Tesla, which relies on strong consumer demand for its premium electric vehicles. A weakening economy could dampen consumer spending and reduce demand for discretionary items like cars.*
Higher Unemployment Forecast:
The Fed also revised its unemployment projections upward, now expecting a 4.4% jobless rate in 2024, compared to the previous forecast of 4.0%. Rising unemployment could further dampen demand for Tesla’s vehicles, as increased joblessness typically strains household budgets, especially for large purchases like electric cars.*
Concerns Over Tesla’s Margins:
With a weakening economy, Tesla might need to lower vehicle prices or offer more incentives to maintain demand, potentially impacting their profit margins. The company has already implemented several rounds of price cuts throughout 2024 to stay competitive in the growing EV market, which has seen increased competition from established automakers and new entrants.*
Inflation and Fed’s Confidence in Rate Cuts:
Although the Fed’s downward revisions of inflation forecasts for 2024 and 2025 suggest a softer inflationary environment, they might also indicate a prolonged period of disinflation. This prolonged slowdown in inflation and economic activity could hinder Tesla’s growth prospects, particularly in key markets like the U.S. and Europe, where consumer spending may decelerate.*
Valuation Concerns Amid Volatility:
Tesla, traditionally valued at high multiples compared to its earnings, faces heightened volatility during periods of economic uncertainty. The combination of a slower economy, higher unemployment, and potential margin pressures raises concerns about the sustainability of Tesla’s lofty valuation. This could trigger profit-taking among investors following the initial Thursday rally.
How to Buy TSLA Stock:
Besides going to a brokerage platform to purchase a share, or even a fractional share, of Tesla stock, you can also access shares through other avenues. You can invest in an exchange traded fund (ETF) that holds Tesla stock itself or allocate your 401(k) to a strategy that acquires shares in a mutual fund or other instruments. For example, Tesla falls under the Consumer Discretionary sector. An ETF focused on this sector will likely hold shares in many liquid and large companies, allowing you to gain exposure to trends within this segment.According to Benzinga Pro, TSLA has a 52-week high of $271.00 and a 52-week low of $138.80.
