Shares of electric vehicle (EV) stocks Tesla, Rivian, and QuantumScape were all rallying on Friday, up 4.3%, 8.8%, and 4.3%, respectively, as of 2:28 p.m. ET.
There wasn’t any company-specific news today, so the moves can likely be attributed to Federal Reserve Chair Jay Powell’s dovish speech today at the annual Jackson Hole conference.
The prospect for lower interest rates would be a huge lift to all stocks that have been hammered by the rise in rates seen over the past two years, and EV stocks have been some of the hardest hit.
“The time has come”
Powell made news this morning by declaring in his speech, “The time has come for policy to adjust.” This declarative statement was perhaps even more definitive than investors were expecting, and indicated the Fed will most certainly lower interest rates in September, perhaps even by 50 basis points.
That led to concerns the Fed was late to cutting rates, which could lead to a recession. However, Powell seemed quite confident in his speech that the data points more toward a “soft landing,” or lower inflation and interest rates without severe job losses, thanks to the central bank keeping long-run inflation expectations anchored.
Electric vehicle stocks rallied, and it’s not hard to figure out why. EV stocks have been hammered over the past several years by high interest rates in two ways.
The second way high interest rates hurt EV companies is by raising the cost of capital and hurdle rates. This is especially bad for low-profit or loss-making companies like Rivian and QuantumScape, and even high-multiple stocks like Tesla.
So, a lowering of interest rates without a recession would be a huge relief for EV stocks on those two big fronts.
Image source: Getty Images.
But lower rates aren’t a cure-all
While lower rates would certainly help a whole lot, just remember that unlike other technologies, auto production is generally a capital intensive, cyclical, and competitive low-margin business.
Interestingly, QuantumScape also recently inked a deal with Volkswagen that will inject more cash via a technology license, but will also cede QuantumScape’s intellectual property to Volkswagen in the future.
As you can see, interest rates are only one piece of the puzzle. The auto industry is being disrupted by EV and autonomous technologies with high uncertainty, so investing in the sector isn’t for the faint of heart — even with lower rates.
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