In today’s session, EV stocks are once again in focus for investors. Whether it’s Workhorse (NASDAQ:WKHS), Lordstown Motors (NASDAQ:RIDE), Canoe (NASDAQ:GOEV), Polestar Automotive (NASDAQ:PSNY), Nikola (NASDAQ:NKLA) or Nio (NYSE:NIO), there’s a lot of green on the screen. These top EV stocks are all up between 5% and 33% in today’s session. This suggests that investors are indiscriminately piling into this high-growth area of the market.
Interestingly, there don’t appear to be any specific company-related catalysts in play for these more speculative EV stocks today. Rather, a broad range of macro factors seems to be at play, driving these early-stage companies higher today.
Lower inflation readings and an associated pause from the Federal Reserve yesterday have investors considering the possibility of future rate cuts. Such rate cuts could spur another 2021-like rally, suggesting that these previous high-flyers could soon return to form. As market participants often try to get ahead of such moves, this view could be leading to some of the incredible momentum we’re seeing today.
Additionally, there’s some speculation building that EV stocks could join their artificial intelligence (AI) peers in a meme-like rally from here. These companies were beaten down in 2022 and saw their valuations come down to very low levels. Thus, if previous highs are to be approached, the potential upside with these companies could be considerable.
Let’s dive more into what to make of this incredible move in these top electric vehicle players.
EV Stocks Soar as Fed Rate Pause Is Digested
There are many reasons why EV stocks may be considered too speculative for certain investors. Inflation is still stubbornly high, borrowing costs remain elevated, and charging anxiety is limiting consumer adoption of EVs. These are among the myriad challenges that took the EV sector on a massive downturn in 2022.
However, a shifting macro environment toward one that could result in lower rates would undoubtedly help these early-stage companies. Many of the aforementioned EV stocks came public via reverse special purpose acquisition company (SPAC) mergers. The valuations many of these companies saw in 2021 reflected incredible enthusiasm around the growth of the sector and valuations that matched a zero interest rate environment.
Thus, if interest rates come down, the valuations of these early-stage companies may be too bearish at current levels. Many of the companies on this list are now in the production phase and should be valued on a future cash flow basis. The key question many investors have with modeling out these stocks is what discount rate should be used. Today, that number is clearly getting adjusted lower, boosting valuations.
Is this move too much, too fast? Perhaps. But these stocks now have significant momentum, and we saw what happened in the past. It appears investors are banking on a big surge in this sector, and we’ll have to see if they’re right.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
