What happened
Electric-vehicle (EV) stocks had an explosive day on Tuesday, as shares moved higher across the board. The potential for lower interest rates has excited investors, and once again, the EV space is an obvious place to look for growth.
Shares of Rivian (RIVN 1.03%) jumped as much as 7.5% in early trading, Nikola's (NKLA 2.58%) stock was up 6%, and Lordstown Motors (RIDE -2.70%) jumped 7.3%. But it wasn't just EV manufacturers that moved higher. Charging-company ChargePoint (CHPT -1.43%) was up 3.5%, and next-generation battery company QuantumScape (QS -1.98%) rose 5.6%.
So what
Investors are seeing a little weakness in some EV competitors today with Tesla (TSLA -3.55%) and Ford announcing price cuts in January. But today's news in Tesla's 10-K filing with the SEC was that the company's full self-driving product is being looked into by the Department of Justice. There seems to be some weakness in Tesla, and if competitors are going to take advantage, it would be now.
Part of today's move is related to interest rates, which are in focus as the Federal Reserve starts a two-day meeting today. Investors are speculating that recent inflation and wage data shows that there's much less price pressure than in previous months, which may cause the central bank to slow rate increases. Not only is this meeting going to be a focus, but projections for a March increase will be watched closely.
Why are investors piling into electric-vehicle stocks as a result?
Higher interest rates have a multipronged impact on EV stocks. For companies, lower rates mean it's less costly to raise capital, whether that's debt or equity. This is why growth and higher-risk investments are climbing today.
For consumers, the impact can be more immediate. The difference between a 7% interest rate on a car loan and a 4% rate can be significant. And if rates don't climb meaningfully, the U.S. may avoid a recession in 2023. Add it all up, and this year could be better than expected for EV demand.
Now what
A lot of this move is due to traders getting out in front of tomorrow's Federal Reserve announcement and meeting. If the central bank takes a more cautious approach to raising rates, it could mean stronger demand over the next year or two.
I would caution speculating on any of these companies, given their current financial positions. They're all reporting losses, and that won't end anytime soon, as they ramp up production.
RIVN Net Income (TTM) data by YCharts.
Not only are there questions about whether Rivian, Nikola, and Lordstown will ever make money, we don't know if QuantumScape's technology will be scalable or if ChargePoint has a sustainable business model.
We'll get more info about these companies next month when earnings start coming out, but caution is what I would stress right now. Today's move is driven by speculation, not fundamentals, and fear of missing out on the next leg higher can lead to poor investment decisions. It's better to wait until after earnings when more is known about operations before jumping into any of these shares.
