The Federal Reserve is widely expected to cut interest rates on Wednesday, for the first time in nearly four years. With the current benchmark rate between 5.25% and 5.50%, there is significant room for the central bank to lower borrowing costs, starting with a possible 25-50 basis point cut. The potentially long cycle of rate cuts could extend over the next few quarters. But what does this mean for Tesla, and will it solve the company’s demand problems? Also read our analysis of other ways to profit from the Fed’s next move.

Higher interest rates have proven to be a headwind for the entire auto industry, and Tesla is no exception. Elon Musk has suggested that the Federal Reserve’s tight monetary policy is a key factor in Tesla’s declining sales, especially in the U.S. market. With financing costs so high, many potential car buyers have held off on making a purchase. For comparison, Tesla’s total deliveries in the first half of 2024 fell about 11% year-over-year to 792,188 units, a sign that the automaker is feeling the strain of high borrowing costs. A rate cut would help make vehicle financing more affordable, reduce monthly payments, and encourage some undecided buyers to complete their purchase. As interest rates fall, financial institutions are likely to gradually pass on the lower borrowing costs to consumers, which could help spur demand in the auto market. For Tesla, a Fed rate cut could act as a catalyst, potentially reversing some of the downward pressure on sales.

While the rate cut may ease some of the pressure on Tesla, we believe the challenges facing the company run deeper than the tight monetary environment. Auto affordability remains a broader issue across the U.S. auto industry, and competition is heating up in the electric vehicle space as well. While established automakers typically refresh their models every seven to eight years, the design of Tesla’s current lineup – the Model 3, Y, X and S – has remained largely unchanged since launch. The Model S, for example, was first launched in 2012 and has only seen gradual exterior design updates since then. This aging lineup is beginning to pale in comparison to newer electric vehicle offerings, particularly from competitors in China, where local manufacturers produce a diverse range of attractive electric vehicles. In addition, the market for first-time electric vehicle buyers appears to be saturated, reducing the pool of first-time buyers. Tesla’s aggressive price cuts last year, aimed at boosting demand, also appear to have lost their initial impact as price competition gets tougher. Did you know that Tesla also has a fast-growing clean energy business? Could this help de-risk the company’s auto business?

Overall, the performance of TSLA stock compared to the index has been quite volatile over the last 3-year period. The returns for the stock were 50% in 2021, -65% in 2022 and 102% in 2023. In contrast, the Trefis High Quality Portfolio with a collection of 30 stocks is significantly less volatile. And it has outperformed the S&P 500 every year in the same period.

Why is that? As a group, the HQ Portfolio stocks delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as shown by the HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could TSLA find itself in a similar situation as it did in 2022 and perform worse than the S&P in the next 12 months – or will there be a sharp jump?

We maintain our view that Tesla will be a major beneficiary of the long-term transition to cleaner mobility and energy production due to its well-functioning supply chain, superior battery and drive technologies, and leadership in vehicle software and autonomous driving technology. Nevertheless, the company is likely to face pressure on its deliveries and earnings this year, well below the company’s multi-year goal of 50% annual revenue growth. We value Tesla stock at $230 per share, which is roughly in line with the current market price. See our analysis on Tesla valuation: Is TSLA stock expensive or cheap? For more details on Tesla’s valuation and how it compares to other companies, please visit our overview page at Tesla sales: How does TSLA make money? Want to profit from the EV market without getting involved in individual EV brands? Check out our EV Provider Stocks topic. While investors hope for a soft landing for the U.S. economy following the rate cuts, how bad can it get if another recession hits? Our How Low Can Stocks Go During a Market Crash dashboard tracks how major stocks performed during and after the last six Market crashes.

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