Tesla stock crashes 8% as Elon Musk plans to reenter politics: analysts are worried

Tesla shares dropped sharply in early trading on Monday following CEO Elon Musk’s announcement over the weekend that he plans to form a new political party.

The TSLA stock was down over 8% reflecting investor concerns about the potential implications of Musk's renewed political involvement.

Musk revealed on social media that the party would be called the “America Party” and suggested it would focus on a narrow group of legislative races.

“Just 2 or 3 Senate seats and 8 to 10 House districts” would be enough to sway legislation, Musk claimed, positioning the party as a swing vote capable of shaping contentious policies.

Analyst worried over Musk's political comeback

Musk’s growing political ambitions have long been a contentious issue among investors, many of whom fear it could distract from Tesla’s core business at a time of heightened operational challenges and market competition.

“Very simply, Musk diving deeper into politics and now trying to take on the Beltway establishment is exactly the opposite direction that Tesla investors/shareholders want him to take during this crucial period for the Tesla story,” said Dan Ives, global head of technology research at Wedbush Securities, in a note on Sunday.

While Ives acknowledged that Musk retains support from a loyal base of shareholders, he noted there is “a broader sense of exhaustion” among other investors over Musk’s political activity.

Earlier this year, Musk’s involvement with the federal Department of Government Efficiency (DOGE) and his close cooperation with President Donald Trump had also rattled investors.

His departure from DOGE in May was seen as a positive development for the stock, which gained momentum in the aftermath.

Musk-Trump feud

Musk’s political alignment with Trump has since deteriorated, particularly over key policy disagreements.

One flashpoint has been Trump’s latest tax and spending bill, which Musk has criticised for increasing the national debt and cutting clean energy incentives.

The bill, signed into law on Friday, is an expansion of the 2017 Tax Cuts and Jobs Act and includes permanent tax rate adjustments, increased defense spending, and reductions in health care and nutrition programs.

Critically for Tesla, the legislation eliminates the $7,500 federal tax credit for the purchase or lease of new electric vehicles, a key incentive that has historically supported EV adoption.

The credit will be phased out by September 30, a timeline that could impact Tesla’s short-term sales dynamics.

Will the bill hurt Tesla?

William Blair analyst Jed Dorsheimer downgraded Tesla to Market Perform from Outperform on Monday, citing both the removal of the EV tax credit and changes to fuel economy penalties as major headwinds.

The bill also includes a lesser-known provision cutting fines for noncompliance with Corporate Average Fuel Economy (CAFE) standards—an indirect hit to Tesla’s lucrative regulatory credit business.

“While the $7,500 tax credit is likely to affect demand, the combination of a demand headwind and over $2 billion in profit from regulatory credits at risk may be too much for investors to bear,” Dorsheimer wrote in a client note.

He warned that the rollback of regulatory credit revenue would deliver a “direct hit to profitability.”

Dorsheimer expects the end of the EV credit to drive a short-term spike in third-quarter volumes as buyers rush to qualify, followed by weaker sales and margins in the fourth quarter.