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What Tesla's Recent Rally Implies for the Broader Market

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The ongoing impressive rally of Wall Street is predominantly fueled by the generative artificial intelligence (AI) behemoths and the so-called “magnificent seven.” The latest example is Tesla Inc. (TSLA - Free Report) . The stock price of the global giant in the electric vehicle (EV) space has appreciated more than 37% in the past nine trading sessions.

The recent rally started after Tesla announced that it delivered 443,956 units in second-quarter 2024, beating the consensus estimate of 439,302. Total production in the same quarter came in at 410,831. The stock price of Tesla fell 40% from the beginning of the year in mid-April after its first-quarter delivery of 386,810 units fell well below the consensus estimate of 449,080, marking its first year-over-year quarterly decline in deliveries since 2020.

However, following the recent rally, the stock is in positive territory year to date. At this stage, the question is, will just a delivery beat in the second quarter induce such a big rally?

The chart below shows the price performance of Tesla year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Headwinds Persist

Although deliveries surged 14.8% sequentially, it is still down 4.8% year over year. Tesla is facing massive competition in its largest market, China. Its Chinese peers Li Auto Inc. (LI - Free Report) , Nio Inc. (NIO - Free Report) , and XPeng Inc. (XPEV - Free Report) delivered record EVs last quarter. Moreover, Tesla’s aging lineup is a major concern.

Following pathetic first-quarter deliveries, the EV behemoth announced that it will retrench 10% of its global workforce. The global EV space is quickly getting saturated. Apart from Chinese EV makers, Indian giants like Tata Motors and Mahindra & Mahindra are extensively serving the indigenous market as well as internationally.

Shrinking automotive margins amid aggressive price cuts and discounts have been plaguing Tesla. To stimulate sales, it has offered various discounts and incentives, such as zero-interest loans for Model 3 and Model Y purchases in China.

Last month, CEO Elon Musk warned that deliveries and sales will remain tepid for the time being as the industry goes through a transitionary period. The company expects its vehicle volume growth rate for 2024 to be noticeably lower than 2023 amid a cooling EV market.  

At present, Tesla’s average price target of brokerage firms represents a downside risk of 28.8% from the last closing price of $252.94. The brokerage target price is currently in the range of $22.86 to $310.

Zacks Investment Research
Image Source: Zacks Investment Research

Near-Term Tailwinds

Nevertheless, all is not bad for Tesla. The EV giant’s focus on autonomous driving and AI is expected to be a game changer. It aims to launch affordable vehicles, transition into an AI company and is banking on its robotaxi venture. The successful introduction of its Full Self Driving (FSD) software in China is another positive.

Additionally, Tesla’s Energy Generation and Storage business is thriving. Tesla said that it deployed 9.4 gigawatt hours of energy storage products in the second quarter, reflecting its highest quarterly performance to date. This shows that Tesla is not just a simple EV manufacturer.

At present, the Zacks Consensus Estimate shows that Tesla’s full-year 2024 earnings will plummet 20.5% year over year. However, earnings estimations for the current year have improved over the last 30 days.

Zacks Investment Research
Image Source: Zacks Investment Research

Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rally Says Bulls Will Roar

The Tesla rally clearly indicates that buy-on-the-dip should be the moto for Wall Street investors this year (read: Catch These 5 Big Fishes at Next Dips for Long-Term Gains).

Any dip should be considered as a good buying opportunity. Just a single positive catalyst, such as a quarterly delivery beat by Tesla will lead to a spike in stock prices.

The bull run is expected to continue in the second half supported by a resilient U.S. economy, a declining inflation rate and solid earnings results. Wall Street participants have turned optimistic on interest rate cuts by the Fed following the recently released soft economic readings.

The CME FedWatch tool currently shows a 77.1% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% just a week ago. Moreover, the interest rate derivative tool also shows a 73.4% probability of two rate cuts by the end of 2024.

A lower interest rate regime will boost economic growth, speeding up investments by businesses. Several companies depend on cheap sources of credit as the full potential of their business is realized over a long period.

A low risk-free interest rate will reduce the discount rate thereby increasing the net present value of investment in stocks. Additionally, the global supply-chain system has been restoring slowly since last year as U.S. corporate behemoths are rescheduling their supply-chain system’s bypassing of China.

Wall Street has plenty of liquidity. At the beginning of 2024, a preliminary estimate revealed that a massive $1.4 trillion entered U.S. money market funds primarily due to an extremely high interest rate regime, with cash yielding around 5% (read: Best Investment Strategy for 2024: Buy on the Dip).

A systematic decline in the market interest rate will shift a major part of these gigantic funds to equity markets.  

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