Shares of Tesla Inc TSLA are down 1.91% to $239.38 Friday afternoon, reversing gains from Thursday's trading session, amid this week’s unexpected 50-basis-point interest rate cut by the Federal Reserve and overall market weakness.
The decline comes as broader concerns about economic growth and demand pressures begin to weigh on the electric vehicle (EV) maker's outlook.
Initial Rally On Lower Rates: Tesla stock surged on Thursday following the Federal Reserve’s decision to cut interest rates by 50 basis points at the September Federal Open Market Committee (FOMC) meeting, reducing the federal funds rate to a range of 4.75% to 5%. This larger-than-expected rate cut was welcomed by growth-oriented companies like Tesla, which stand to benefit from lower borrowing costs.
The Fed's updated Dot Plot signaled the possibility of additional rate cuts in 2024 and 2025, leading to optimism that cheaper financing would spur demand for capital-intensive goods such as electric vehicles. Lower interest rates also typically make it easier for consumers to finance big-ticket purchases like cars, further boosting demand for Tesla's vehicles.
Despite Thursday’s positive market reaction, Tesla shares dropped on Friday as investors digested the broader implications of the Federal Reserve's latest projections. Several key factors contributed to the decline:
Weaker Economic Growth Outlook: The Federal Reserve revised its GDP growth forecast for 2024 down from 2.1% to 2.0%, signaling slower economic activity ahead. Tesla, which relies on strong consumer demand for its premium electric vehicles, is vulnerable to any signs of economic weakening. A slower growth environment could weigh on consumer spending and potentially 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, up from the previous 4.0%. Rising unemployment could further dampen demand for Tesla's vehicles, as higher joblessness tends to constrain household budgets, particularly for large purchases like electric cars.
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Concerns Over Tesla's Margins: With a weakening economy, Tesla might need to lower vehicle prices or offer more incentives to maintain demand, potentially squeezing profit margins.
The company has already engaged in several rounds of price cuts throughout 2024 to stay competitive in the growing EV market, which has seen increased competition from legacy automakers and new entrants.
Inflation and Fed's Confidence in Rate Cuts: While the Fed's downward revisions of inflation forecasts for 2024 and 2025 signal a softer inflationary environment, they may also hint at a prolonged period of disinflation.
A 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, which is traditionally valued at high multiples compared to earnings, faces heightened volatility during periods of economic uncertainty.
The combination of a slower economy, higher unemployment, and potential margin pressures raises questions about the sustainability of Tesla's lofty valuation. This could prompt profit-taking among investors after Thursday's rally.
How To Buy TSLA Stock
Besides going to a brokerage platform to purchase a share – or fractional share – of stock, you can also gain access to shares either by buying an exchange traded fund (ETF) that holds the stock itself, or by allocating yourself to a strategy in your 401(k) that would seek to acquire shares in a mutual fund or other instrument.
For example, in Tesla’s case, it is in the Consumer Discretionary sector. An ETF will likely hold shares in many liquid and large companies that help track that sector, allowing an investor to gain exposure to the trends within that segment.
According to data from Benzinga Pro, TSLA has a 52-week high of $271.00 and a 52-week low of $138.80.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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