Tesla's Political Crossroads: Can the Stock Recover from the Trump-Musk Fallout?

The feud between Elon Musk and Donald Trump has erupted into a full-blown storm, sending Tesla's stock into a tailspin and raising critical questions about the sustainability of its sky-high valuation. A 14% single-day plunge in late May 2025—erasing $150 billion in market value—has investors wondering: Is this a buying opportunity, or the beginning of a long-term reckoning?

The conflict stems from Musk's vocal opposition to Trump's proposed budget reconciliation bill, which seeks to eliminate federal EV tax credits. For Tesla, these credits have been a linchpin of U.S. sales growth. The clash has now spiraled into a broader political battle, with Tesla's very business model under threat. Analysts warn that the fallout could accelerate regulatory scrutiny of its autonomous driving systems, already under investigation by the U.S. Transportation Department.

Regulatory Uncertainty: The Sword of Damocles
The feud has amplified risks tied to Tesla's reliance on its controversial “Full Self-Driving” (FSD) software. Unlike rivals, Tesla uses camera-based detection systems instead of radar or lidar, a decision regulators increasingly question. A Department of Transportation probe, now under heightened scrutiny due to Trump's involvement, could force costly changes or delays.

"text2img>A Tesla Model S driving with its camera-based sensors highlighted, symbolizing the regulatory scrutiny over its autonomous technology

Adding to the pressure, Trump has threatened to revoke Tesla's government contracts, including those held by SpaceX. While Musk has dismissed the threats as “bluster,” markets are reacting with fear. The House's push to end EV subsidies by late 2025 further jeopardizes Tesla's U.S. sales momentum, which already faces headwinds from rising competition in Europe.

Valuation Sustainability: A 120x PE Multiple in Peril
Tesla's stock trades at a trailing 12-month P/E ratio of over 120x—a multiple more than 10 times that of Ford or Toyota. This premium reflects investor faith in Musk's vision of autonomous robotaxis and global dominance in EVs. But the political and regulatory crossfires are testing that faith.

The chart shows Tesla's volatility far outpacing broader markets, with its recent drop below critical moving averages (50-day and 200-day SMAs) signaling a bearish shift. Meanwhile, fiscal 2025 and 2026 EPS estimates have been slashed by 25% and 18%, respectively, over 60 days. These trends have pushed Tesla to a Zacks Rank #5 (Strong Sell).

Investors must ask: Can Tesla's autonomous driving ambitions, which Musk calls “critical to the future,” overcome regulatory hurdles and justify this valuation? The answer hinges on two factors:

1. Political Mitigation: Can Musk navigate the feud without further alienating policymakers? His role as a former special government employee (at the DOGE) complicates matters, as does his defiance toward Trump.
2. Competitive Resilience: Tesla's sales in key markets like Germany and the U.K. have plummeted by 36% and 45%, respectively, while Chinese brands like BYD surge. Without U.S. tax credits, can Tesla retain its pricing edge?

Investment Considerations: Timing the Bottom?
The $150 billion market cap drop has created a stark opportunity for contrarians—but the risks remain asymmetric. On the bullish side, Tesla's long-term prospects in EVs and robotics remain intact, and the stock's technical rebound could follow a resolution of the feud or regulatory clarity.

However, the headwinds are formidable. The PE multiple is now at a level that demands flawless execution, yet Tesla's sales are weakening, its regulatory battles are intensifying, and political risk remains unresolved. Short sellers have already capitalized, with Tesla topping the Zacks Short Sale List for a 20% gain.

Conclusion: Proceed with Caution
Tesla's stock may stabilize if Musk can de-escalate tensions with Trump and secure a path for autonomous driving approvals. But investors should demand concrete progress on these fronts before considering the stock attractive. At its current valuation, the company needs near-perfect outcomes—something no company, even one led by Musk, can guarantee indefinitely.

For now, the prudent move is to wait for clearer signals: a cooling of the feud, a reversal of the subsidy cuts, or a breakthrough in FSD regulatory approval. Until then, Tesla's volatility remains a political and financial minefield.