Turnaround Tuesday, as Tesla blames Trump’s tariffs for poor performance

The big news on Tuesday was the rapid shift in sentiment during the US trading session. US stocks surged, led by the financials sector and consumer discretionary. The driver was once again tariffs, which is dominating market sentiment for another week. This time the news was risk-positive, Treasury secretary Scott Bessant raised hopes about a de-escalation of the trade war between the US and China. Added to that, President Trump rolled back on his threats to sack the chair of the Federal Reserve, Jerome Powell, which could boost risk sentiment on Wednesday. US indices climbed more than 2.5%, erasing Monday’s loss, the US dollar picked up and gold fell back from its record high at $3,500.

We mentioned earlier on Tuesday that the market continues to be news driven. The Treasury secretary, who has been parachuted in, yet again, to deliver calming news to the market, said that the trade war between the US and China cannot continue, during a private event. He stressed that negotiations between the US and China have not yet started, however, even the hope of a climbdown from  the de-facto trade embargo between the US and China was enough to boost risk sentiment. Combined with Trump’s comments about Fed chair Powell, there could be growing optimism that the US financial system is stepping back from the cliff edge, as we move into the middle of the week.

De-escalation of US/ China trade fuels recovery rally

US Treasury yields fell at the long end, even though short-term yields rose as the prospect of repair between the Chinese and US trade relationship helped to ease growth fears.  The USD managed to claw back some losses vs. safe haven currencies like the yen and also the euro, and it managed to eke out a gain vs. the AUD and the NZD. The gold price fell 1.4% and the Vix, a gauge of Wall Street’s volatility, fell back to levels reached before the Easter break. Whether or not the recovery in risk sentiment lasts will depend on what comes after Bessant’s words about de-escalation of trade tensions. If there is positive progress, or if China makes positive noises overnight, then this could boost risk sentiment into Wednesday.

Tesla results: markets are willing to see past the big earnings miss

Markets remain desperate to hear any positive news, and the sharp reversal on Tuesday highlights the market’s thirst for a driver to lead to a prolonged recovery in risky assets. Financial markets hate uncertainty, and since April 2^nd, that is all they have been faced with. This may explain the relatively mild reaction to Tesla’s earnings, that were released tonight. The results for last quarter were a comprehensive miss. Revenues were $19.34bn, lower than the $21.37bn expected, Q1 earnings per share was $0.27 vs. $0.43 expected, which suggests a meaningful hit to profitability in the last quarter. Like Delta and a number of other companies, Tesla also refrained from giving any guidance for 2025 sales and rate of growth. The company blamed US tariff policy and the impact this will have on its supply chains.

Elon Musk is finding out that politics combined with a commercial venture do not always mix. Sales of models Y and 3 were down 12% last quarter, while sales of the cybertruck fell by 24%. Partly this is down to Musk’s links to the White House, however, the cybertruck has not caught the  high-end car market’s imagination and can’t compete with the likes of the Land Rover Defender. The future of the cybertruck must now surely be in doubt?

Although the earnings report was grim, investors might be giving Musk the benefit of the doubt. Tesla’s share price was volatile after the earnings release, and was higher by 1% in post market trading, after a 4% surge earlier in the day on Tuesday.

Capex spend is slashed, as Musk will need to do more with less

The good news in this report is that production of Tesla’s new line of models should begin sometime this quarter, although details were scant. Tesla is still selling regulatory credits, which remain a key source of revenue. Without them then the company would have recorded a pretax loss for last quarter. Capital spending also shrank dramatically last quarter, to $1.49bn, down from $2.77bn a year ago. This could be having an ameliorating effect on the stock price; investors may have inflicted more pain on Tesla’s shares if the company continued to spend at a rapid pace.

Even though capex spend is lower, the company remains committed to AI and called it a main pillar of its business. The reality is that it will have to do more with less if it wants to achieve all of Musk’s AI ambitions. However, by taking the red pen to capex spending, Musk was able to eke out positive free cash flow for the last quarter, which is also protecting the stock price from further downside.

Trade wars hit Tesla’s bottom line

Batteries, which are a critical input for Tesla, are also in the firing line from tariffs. Over 80% of Tesla’s lithium batteries are made in China, compared to 5% in the US. This helps to explain Musk’s retreat from the White House. He has been outspoken in his criticism of the new US tariff policy, and it is easy to see why.

The standout from Tesla’s earnings report was the blatant criticism of the White House and tariffs. Only three months’ ago Musk was Trump’s right-hand man, now that relationship looks to be in jeopardy. It will be interesting to see if 1, this helps Tesla sales to recover this quarter, and 2, if other ‘tech bros’ join Musk in criticizing Trump’s economic policies this earnings season.  

A mild reaction to Tesla’s big earnings miss

The limited downside for Tesla’s share price on the back of this suggests that a lot of the bad news around earnings was also priced in. Tesla’s share price has fallen by 39% YTD. If the stock price remains up approx. 1%, then this will be a far less volatile reaction than usual. The average move in Tesla’s share price in the 1-day after an earnings report has been 11% in the past 8 quarters. This suggests that fatigue may have set in when it comes to further downside for Tesla. Added to this, news that the US and China could find a way out of the tariff stalemate is also positive for Tesla due to the importance of China for sales and for its supply chain.

Overall, although Musk’s earnings call will be worth listening to, it will most likely be Scott Bessant and progress between China and US on ending their trade war that wil decide if Tesla’s share price is ripe for recovery.