The S&P 500 could face another major downturn if rising oil prices push inflation higher and force the US Federal Reserve to keep raising interest rates. The index last entered bear-market territory in 2022 and 2023, when high inflation led the Fed to aggressively increase interest rates.
The S&P 500 is also trading at a very high valuation. Its Shiller CAPE ratio is currently 41.2, making it the second-highest valuation level since the peak of the dot-com bubble in 2000. The Motley Fool argues that the combination of expensive stocks, higher interest rates and weaker investor sentiment could increase the risk of a sharp S&P 500 decline. A new S&P 500 bear market could be especially painful for Tesla investors. During the previous bear market, Tesla stock fell 75% from its peak, dropping as low as $108. Its trailing 12-month earnings per share dropped from $4.30 to just $1.08 over the past two years. This high valuation could become a major problem if the S&P 500 enters another bear market. When the stock dropped to around $108 in late 2022, its P/E ratio fell to about 30.
Because its earnings have weakened significantly over the past two years, tesla could face an even bigger fall this time. The company is therefore entering a possible market downturn with a much higher stock valuation relative to its current earnings, The Motley Fool argued. Tesla’s earnings have fallen sharply as a result of these pressures. Because they want to reduce risk, during market downturns, investors often cut positions in expensive stocks first.
The company was once the clear global EV leader, but it has lost market share to Chinese manufacturers such as BYD, Geely and Zeekr. A high valuation can make the stock market more vulnerable when interest rates rise or economic conditions weaken. Tesla’s position in the electric-vehicle market has changed significantly. Tesla has also reduced vehicle prices to attract more buyers. they also put pressure on the company’s profit margins While lower prices can help boost sales. Tesla’s previous crash shows how quickly its valuation can fall.
Tesla’s future products are not ready to replace its current business
Tesla’s own artificial-intelligence software vice president, Ashok Elluswamy, said the company’s robotaxi program had completed about 380,000 miles of driverless operation across two US states as of June 30. Waymo is already completing more than 500,000 paid autonomous trips every week across 15 major US cities. Meaningful Optimus production is not expected to begin until 2027 at the earliest, meaning the humanoid robot is unlikely to significantly improve Tesla’s earnings in the near term.
Tesla is still developing its supply chain and working through difficult engineering problems, according to The Motley Fool. Tesla is still behind Alphabet’s Waymo in autonomous-ride operations. Tesla’s other major future bet, Optimus, is also not ready to become a large commercial business yet.
