Elon Musk’s Trump Trade Makes Tesla A Winner With $570 Billion Rally

Elon Musk's association with the Trump administration has sparked a significant surge in Tesla's stock price, contributing to a remarkable $570 billion rally. This increase raises questions about Tesla's resilience amid challenges, particularly related to federal subsidies for electric vehicles (EVs). If the administration proceeds with plans to cut these subsidies, it could make Tesla cars even pricier compared to traditional gas-powered vehicles. According to Barclays analyst Dan Levy, approximately two-thirds of Tesla's US sales—and around 20% of its global sales—currently benefit from these tax incentives.

However, there is a silver lining. The potential subsidy cuts are likely to hurt Tesla's smaller domestic rivals more than it will impact Tesla itself. This scenario could help Tesla consolidate its market position, making it more dominant in the EV market.

While some investors are betting on easing regulations, the timeline for such changes is uncertain. Even with relaxed regulations, there are no assurances that Tesla's upcoming 'Cybercab' will be road-ready. There is concern that premature deregulation might inadvertently benefit Tesla's primary competitor in self-driving technology, Alphabet Inc.’s Waymo.

Understanding the Stock Surge

The notable rise in Tesla's stock price has stirred various theories among Wall Street investors. Many see opportunities stemming from Musk's growing influence in Washington and the heightened activity among retail traders. The recent electoral victory of Trump is perceived as a potential transformative moment for Tesla, which could yield substantial benefits for the company down the line.

Cole Wilcox, a portfolio manager at Longboard Asset Management, emphasized that those who have opposed Musk and Tesla in the past have consistently been proven wrong. He noted, "There is nothing in his way that can prevent him from executing his visions now." In a broader sense, both Tesla and Bitcoin have emerged as prominent symbols of the recovery in market conditions following the elections.

Interactive Brokers' Sosnick pointed out that the current rally bears similarities to trends witnessed in 2020 and 2021. In 2020, Tesla's stock surged over 740%, experiencing another 74% increase up to November 4, 2021, which marked its peak. This momentum coincided with a time when Tesla's sales and profits were soaring, alongside a positive outlook for EV demand.

However, the surge came to a halt when concerns about inflation and rising interest rates began to circulate in 2021. Additionally, Tesla faced warnings about unexpected declines in EV sales and shrinking profit margins, making it challenging for the stock to regain its previous heights. Following Trump's election, Tesla finally achieved its first new record since 2021.

The Options Market and Future Prospects

The options market reveals a similar story of Tesla's popularity. Over the past month, it has ranked as the fifth largest equity options position in the United States, according to Rocky Fishman, founder of Asym 500. The top four positions are held by major indices such as the S&P 500 and the Nasdaq 100 Index.

Tom Keen, an options trader at Piper Sandler, commented on a prevalent tendency among investors to pursue upside opportunities involving Tesla stock. The strategy of owning call options has proven successful, leading more investors to continue this practice.

As long as this trend persists, Tesla's shares are poised for further increases. Investors familiar with Tesla's history of rapid price surges remain optimistic about the future. With Musk's involvement in the Trump administration, the ultimate trajectory of the company remains uncertain but potentially promising.

DataTrek's Colas noted that while the market's focus on Musk's endeavors is intense, Tesla is the primary means for investors to engage with Musk's influence publicly. Consequently, many investors may disregard conventional considerations of valuation when trading Tesla stocks.

The current economic landscape, particularly with the Federal Reserve's readiness to address inflation, presents a unique challenge for the so-called "Trump trade," as it could face tests from various market fluctuations.

Tesla, Musk, Trump