Shares of electric vehicle (EV) stocks jumped Thursday as investors processed the news out of Wednesday's Federal Reserve meeting, and specifically, its decision to keep the benchmark federal funds rate unchanged at between 5.25% and 5.5%.
Second-tier EV companies were the ones most impacted by the news. Rivian (RIVN 6.10%) rose by as much as 10%, Lucid Group (LCID 0.41%) popped by as much as 12.3%, and Fisker (FSRN -12.70%) jumped by as much as 9.7%. As of 1:40 p.m. ET, the stocks were up 7.8%, 10.4%, and 8.2%, respectively.
Image source: Getty Images.
Interest rates and EVs
The broader market moved higher on Thursday, in part due to speculation that the Federal Reserve will keep short-term interest rates where they are for a while. This week's meeting was the second in a row that interest rates were left unchanged, and multiple economists predict that rates will remain flat through the end of 2024.
In Thursday's trading, the yield on the 10-year U.S. Treasury fell 6 basis points to 4.67%, indicating that investors are expecting rate cuts in the future. If that happens, it would be bullish for stocks and the EV market.
The direct impact on EVs could be lower interest rates on auto loans, which would make it more affordable to buy cars. But keep in mind that short-term rates aren't expected to come down significantly enough for rates for loans to fall much.
The economy and EVs
Investors are reading the tea leaves Fed Chair Jerome Powell is providing with comments like "economic activity expanded at a strong pace in the third quarter." At the same time, inflation has come down significantly, so the previous rate increases have been having the desired effect.
If Powell is successful in reducing inflation while keeping the economy relatively strong, that would be positive for corporate revenues and earnings, and would be especially helpful for those companies that sell pricey items like electric vehicles. At least on Thursday, this is what investors are speculating on.
Reality for EVs
As nice as the session's bounce in shares has been, investors need to keep the reality of the electric vehicle business in mind. More supply continues to hit the market, putting pressure on EV prices and margins. And these three companies have yet to show they can scale up manufacturing or produce vehicles profitably.
RIVN Net Income (TTM) data by YCharts.
As much as some investors are seeing the current situation as a buying opportunity, I think it's a selling opportunity in companies with a lot of long-term challenges.
Remember that rates for auto loans aren't coming down on Thursday's news -- they're just not rising as quickly as they were a few months ago. Interest rates are still much higher today than they were a year ago, making it less affordable to buy a car. Across the board, automakers are having to cut prices to make the numbers work for consumers, and that's eating into margins.
We also have to factor in the production ramp-ups of companies like Rivian, Lucid, and Fisker, all of which are going to be adding new supply onto the EV market just as demand for EVs is coming down. This doesn't bode well for their finances long term. I just don't see a bright future for EV stocks, and Thursday's speculation about how interest rates and the economy will affect these companies doesn't reflect the fundamental challenges the industry faces.
