Tesla after Trump

Good morning. On Friday, the May jobs report came in much better than feared. The US private sector added 139,000 jobs and the unemployment rate held steady at 4.2 per cent. There were soft spots, including downward revisions for March and April. But broadly speaking, this was a good report. The US stock market approved, rising 1 per cent on Friday. The Fed looks set to hold rates steady for a while longer — despite the president’s demands. Email us: unhedged@ft.com. 

Tesla

Everyone saw it coming. When Donald Trump and Elon Musk made their pact ahead of the 2024 election, it was widely assumed that the partnership would be shortlived. But this was even shorter than we expected. And the break-up was a spectacle.

That spectacle undid much of the boost Tesla stock received from Musk announcing that he would step back from his government work and focus on business. Since Musk’s late April announcement, Tesla had risen nearly 45 per cent. On Thursday, during the mud-throwing contest, the shares went down 14 per cent, and only gained back a little on Friday. Interestingly, that fall leaves Tesla’s shares essentially flat since 2022. Here’s the chart:

Tesla is not a stock that — how to put this? — responds much to fundamentals. While it was already down for 2025, even that fall may have been understating the significant troubles at the automaker. Sales have been plummeting in the US and abroad, as Musk’s personal brand has turned off buyers and as the company has lost ground to other EV makers, particularly cheap Chinese competitors. Analysts had already been steadily downgrading expected sales over the past three years, and are now predicting a steeper decline at the end of this year and in 2026:

Its gross profit margins have eroded as volumes have fallen, and they are expected to go lower still. And the other parts of its business have had major obstacles: its higher-margin battery business has been disrupted by tariffs, while its robotaxi fleet is falling behind competitors like Waymo.

But that brings us to the big question. What does the big drop last Thursday mean? What is the market thinking, as it were? 

We have three (not mutually exclusive) theories. The first is that the market is reacting to the provisions of Trump’s big beautiful bill. A bearish JPMorgan note making the rounds suggests that the bill could cut Tesla’s operating earnings in half. They estimate a $1.2bn drop from the end of the consumer EV tax credit, and a $2.0bn hit from the end of carbon tax credits. Those proposals have been on the books now for a week or two, and have not moved the stock all that much. With Trump and Musk no longer on good terms, it seems unlikely that Musk can convince Republicans to amend the bill.

The next possibility is that the premium built into Tesla’s stock is about more than just the car business. Up until last week, it seemed that Musk’s companies outside of Tesla were getting a boost from his work in the federal government: X debt sold well, and SpaceX and Starlink got various perks. Tesla investors might have been expecting something similar for Tesla. Not now.

A final factor is partisanship. TD Cowen created a breakdown of Tesla’s US sales by each counties’ political leanings. Since the Trump-Musk partnership started, sales in red counties have picked up and are a larger share of the total, while sales have fallen in blue ones:

Itay Michaeli and his colleagues at TD Cowen note that if all red counties were to reach the same level of EV penetration as red counties in Texas, which saw a big bump in the first quarter, there would be a 39 per cent jump in EV sales this year (not just for Tesla). But with Musk now on Trump’s bad side, Republican enthusiasm for EVs — Tesla’s EVs in particular — may wane.

There is a range of views about what could happen from here. While analyst estimates are mostly ticking down, more bullish assessments are out there. Emmanuel Rosner at Wolfe Research argues that the hit from the budget bill could be less severe than predicted by JPMorgan. He breaks it down as follows: 

a) TSLA’s US tariff rate is effectively zero, below competitors . . . in the ~$2000-$6000+ range (creates a pricing umbrella); b) [Management] plans to launch an affordable line-up [likely leading to] healthy margins at scale; and c) medium-term, with federal & state emission standards easing, several automakers will be less inclined to “push” EVs on to the market just for compliance purposes [making a better EV pricing environment]

And who knows where the relationship between the two billionaires will wind up. Their love turned to hate quicker than we imagined. But love and hate are always two sides of the same coin. The bromance could be rekindled.

(Reiter)

The IPO market

American exceptionalism has been cast into doubt. We are told that global investors are turning against dollar assets, or at least hedging them much more carefully; that long-neglected stock markets in the rest of the world are having a moment; that fiscal profligacy puts US Treasuries’ status as the pre-eminent global safe asset into question. And so on. Unhedged is a bit sceptical about all this — while the talk is about revolution, what is happening in markets, looked at carefully, appears incremental. 

Nowhere is the persistence of US exceptionalism more apparent than in the IPO market. When companies need to tap markets for equity funding, it remains America or bust. 

In just the last week, the FT reported on two foreign companies seeking to switch their primary listings to the US: the big Brazilian meat processor JBS, whose shareholders have already approved the plan, and UK fintech Wise. They aren’t the only ones considering the jump. South Korean fintech company Viva Republica and Chinese electric truck start-up Windrose are also opting for US IPOs. 

Over the past 10 years, foreign companies have only made up a modest share of US IPOs, as measured by deal value. Foreign share did go as high as 36 per cent in 2021, but that year is anomalous due to the big Arm Holdings deal.

But looking at the number of deals, rather than dollar volume, the picture is different — since 2023, overseas companies have made up more than 40 per cent of all the IPO listings in the US. So far this year, 60 non-US companies have listed IPOs in the US, making up 43 per cent of the listings and 12 per cent of the total deal value.

US companies are staying private longer, avoiding regulation and scrutiny, and taking advantage of the easy availability of private funding. Volatility from Trump’s tariffs has also made it harder for companies to list — recently, both Klarna and StubHub have had to pause their debuts. 

Foreign companies, however, appear undeterred by the policy chaos in the US. And with good reason. Valuations in the US remain high, in relative terms, despite weakness in the US equity markets and strong performance from global markets. Europe’s Stoxx 600, for example, trades at an average price/earnings ratio of 17 versus 26 for the S&P 500. There is less restriction on executive pay in the US, in terms of both regulation and culture. And the US provides high liquidity, a bigger investor base that brings greater passive investment flows, and the prestige of being associated with the world’s largest exchanges. No other market is truly competitive on these fronts. 

Julian McManus at Janus Henderson thinks growth is the key:

More volatility, usually all things equal, will tend to mean a higher equity risk premium and a lower valuation multiple; the US has managed to escape that rule until now. This is the exceptionalism part. And the reason why it’s been able to be exceptional is because the growth rates that people expect in the US are higher, and compensate investors for that higher volatility. What remains to be seen is whether that continues to be the case.

American exceptionalism may degrade gradually over years. It has not disappeared overnight. 

(Kim)

One good read

Let’s eat.

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