Tesla's Stock Plunge Signals Deeper Vulnerabilities: Why the Musk-Trump Fallout Matters

The bitter public feud between Elon Musk and Donald Trump in June 2025 triggered a historic 14% drop in Tesla's stock price, erasing $151 billion in market value—the largest single-day loss since March 2020. But this plunge is more than a temporary blip. It exposes deeper vulnerabilities in Tesla's valuation, including weak electric vehicle (EV) sales, regulatory headwinds, and Musk's increasingly risky political entanglements.

The Immediate Market Reaction: Options Markets Reflect Controlled Panic

Tesla's stock collapse on June 5 was exacerbated by real-time social media exchanges between Musk and Trump. Musk accused Trump's tax bill of being a “disgusting abomination,” while Trump retaliated, threatening to cancel federal contracts with Musk's companies. The stock's 14% drop was amplified by options market dynamics:

• Put Options Surge: The Jun-06-25 315 and 330 put options saw combined trading of over 68,000 contracts, with retail investors dominating 77%-81% of volume.
• Implied Volatility (IV) Trends: Despite the sharp decline, IV for these puts fell slightly (from 57.1% to 52.1% for the 315 strike) or remained subdued, suggesting traders viewed the drop as a manageable risk rather than a panic sell-off.

Underlying Issues: Erosion of Tesla's Growth Engine

The Musk-Trump clash is a symptom of a broader crisis for Tesla:

1. Slumping EV Demand:
2. Tesla's sales dropped 45% in the U.K. and 36% in Germany in early 2025, as competition from Chinese brands like BYD and domestic rivals like Ford's Mustang Mach-E intensified.

3. U.S. sales are also weakening, with Tesla's Q1 2025 net income down 71% year-over-year.

4. Regulatory and Policy Risks:

5. The U.S. tax bill Musk criticized includes cuts to EV tax credits, which could reduce demand. Meanwhile, California's proposed “pollution fee” for older EVs could hit Tesla's used-car sales.

6. Musk's alignment with Trump's administration has already strained relationships in Europe, where regulators are scrutinizing Tesla's Autopilot safety claims.

7. Brand Decline:

8. Tesla's once-legendary brand luster is fading. A 2025 J.D. Power survey ranked the Model S at the bottom of luxury EVs for owner satisfaction, citing software glitches and poor service.

Musk's Political Entanglements: A Threat to Subsidies and Contracts

Musk's feud with Trump is more than a personality clash—it jeopardizes Tesla's access to critical government support:

• Federal Contracts: Trump threatened to cancel $22.5 billion in SpaceX and Tesla contracts, a move that could derail Tesla's Cybertruck production or SpaceX's Starlink expansion.
• EV Subsidies: Musk's vocal opposition to Trump's bill risks alienating lawmakers who previously backed EV incentives. JPMorgan analysts estimate Tesla could lose $1.2 billion in annual profits if subsidies are cut.
• Reputational Damage: Musk's combative social media tactics—such as accusing Trump of hiding Epstein-related files—undermine his credibility with policymakers and investors.

Technical Analysis: Overvalued, Oversold, or Both?

Tesla's valuation remains a puzzle. The stock trades at 140x projected 2025 earnings—a P/E ratio far above peers like Ford (8.3x) or BYD (43x). Analysts like Wedbush's Dan Ives have downgraded Tesla to “underperform,” citing “execution risks” and a “commodity price war” in EVs.

The Bottom Line: Avoid Tesla Until Risks Subside

Investors should steer clear of Tesla until three conditions are met:

1. Policy Clarity: A resolution to the Musk-Trump feud and a clear path for EV subsidies.
2. Sales Stabilization: Evidence of demand recovery in key markets, particularly in Europe and China.
3. Valuation Alignment: A significant correction to Tesla's P/E ratio to reflect its risk profile and competitive landscape.

Until then, Tesla's stock remains a bet on Musk's ability to navigate political storms and revive flagging sales—a gamble with too little upside and too much downside.

Investment Recommendation: Avoid Tesla (TSLA) until regulatory risks ease and fundamentals stabilize. Consider shorting or selling puts if exposure is unavoidable.

In the words of one analyst: “This isn't a stock to hold through a knife fight.” The Musk-Trump clash is just the opening salvo.