Shares of Tesla, Lucid and Quantumscape rose today

Shares of high-volatility stocks and companies that could benefit from lower interest rates had a great day today as the market anticipates a September rate cut by the Federal Reserve. Not only could interest rates fall, but there are signs that the economy won’t go into too deep a recession if there is one.

Actions of adze (TSLA 5.24%) rose 5.6% today, Lucid (LCID 5.86%) increased by 6.2% and Quantum landscape (QS 6.08%) increased by 6.4%. Shares ended the day up 5.4%, 5.9% and 6.3% respectively.

Inflation and interest rates

A measure of wholesale inflation called the producer price index (PPI) was released today and showed a rise of 0.1 percent in July, below the forecast of 0.2 percent. The PPI rose just 2.2 percent from a year ago, down sharply from June’s 2.7 percent rise.

This is being watched closely as the consumer price index (CPI), a key measure of inflation, comes out tomorrow. If the CPI is at or below the expected 0.2% month-over-month increase, it would likely allow the Federal Reserve to cut interest rates because inflation would be under control.

The Federal Reserve has a dual mandate to keep inflation under control and maximize employment, so traders expect that to mean a rate cut in September. According to Bloomberg, the 10-year U.S. government debt rate fell 6 basis points today alone and has fallen 33 basis points over the past month.

Rates and the EV story

One of the factors holding back large purchases like automobiles and homes is higher interest rates than we saw a few years ago. Tesla’s Elon Musk has talked about this as a headwind to the company’s growth, and there is some truth to that.

What investors are betting on today is that lower tariffs will spur more demand for electric vehicles.

What this theory overlooks is that more factors than just rates go into buying decisions. For example, sales at Ford and General Motors have grown over the past year despite high rates, and they have fallen at Tesla. Are EV buyers more interest rate sensitive than truck buyers?

TSLA Revenue (TTM) data from YCharts.

When you look at Tesla shares trading for multiples of 10 to 20 times more expensive than its Detroit rivals, today’s move makes even less sense.

When you look at the free cash flow from the three companies, it looks more like increased competition and weakening demand for electric vehicles are bigger issues than just interest rates.

TSLA Free Cash Flow Data from YCharts.

Lowering the cost of borrowing a vehicle does not change the competitive dynamics in the industry.

A short jump

Until Lucid and Quantumscape can scale production and demonstrate the ability to make money, they will be extremely risky stocks. Tesla also needs to prove it can grow sales without cutting back on what it does.

I don’t think lower interest rates fundamentally change the challenges facing the electric vehicle market today, and that’s why I’m staying away from this growth. The stock looks too risky to buy today.