Put two mercurial personalities within the room, add competing targets and a hearty dose of media strain, and what do you get? Let’s simply say that the high-profile friend-to-foe saga is not overly stunning.
Elon Musk and Donald Trump are polarizing figures with a penchant for dropping verbal bombshells, and that was significantly evident this week as the 2 sparred over the Huge Stunning invoice, electrical automobile credit, and debt.
The rift could shock some, nonetheless, given how carefully Musk and Trump labored collectively over the previous yr.
Musk spent a whole lot of tens of millions serving to elect Donald Trump as president, and Trump rewarded Musk with a high-profile function in his administration as the pinnacle of the Division of Authorities Effectivity, or DOGE. Trump even went as far as to host a Tesla showroom on the White Home garden to assist Musk after Musk’s political activism prompted a drop in Tesla’s gross sales.
One one who wasn’t in the slightest degree stunned by the high-profile dust-up was veteran hedge fund supervisor Doug Kass. Again in December, Kass picked the break-up as one among his prime 15 surprises for 2025.
It was removed from the one right forecast for Kass. He additionally predicted a inventory market reckoning may trigger the S&P 500 to fall 15%, and in April, he precisely forecast that shares would discover their footing after the brutal sell-off.
Kass not too long ago revisited his tackle Musk and Trump, and the way shares could react to their fallout. His S&P 500 outlook could disappoint many, whereas his tackle Trump and Musk would possibly shock most.
Hedge fund supervisor Doug Kass predicted Elon Musk’s relationship with President Donald Trump would bitter. Kass up to date his outlook on the S&P 500 after the high-profile spat between the mercurial leaders.Picture supply: TheStreet
After back-to-back 20% good points within the S&P 500 in 2023 and 2024, together with a formidable 24% return final yr, buyers could have complacently anticipated extra good instances in 2025.
Then actuality set in. The inventory market has whipsawed amid a collection of shocks, many delivered by President Trump and Elon Musk, by way of his high-profile and much-debated cost-cutting at DOGE.
Shares got here into 2025 arguably priced to perfection. Optimism for a pleasant Federal Reserve shift in financial coverage to dovish rate of interest cuts and a flood of synthetic intelligence spending fueled massive returns final yr, pushing the S&P 500’s price-to-earnings ratio north of twenty-two.
Traditionally, returns following excessive P/E ratios have been largely lackluster. That time wasn’t misplaced on Kass, who appropriately stated in December that the S&P 500 may drop 15% in 2025.
Shares have a tendency to provide lackluster returns within the following yr when the S&P 500 p/e ratio exceeds 20.Picture supply: TheStreet
“Shock #9: In 2025, the S&P Index falls by about 15%. The technology-laden Nasdaq drops by over 20%,” wrote Kass.
Kass beat the bearish drum constantly by means of February, when the S&P 500 reversed after hitting all-time highs. From mid-February by means of early April, bombshells within the type of shockingly excessive tariff bulletins from President Trump and job losses stemming from Musk’s DOGE efforts prompted the benchmark index to plummet. At its worst, the S&P 500 fell 19%, whereas the tech-heavy Nasdaq fell about 24%.
The sharp drop was painful, and lots of hit the promote button, apprehensive that an limitless stream of uncertainty would trigger even higher losses. Kass, nonetheless, appropriately reversed course, making bargain-basement buys on the indexes and tech leaders, together with Amazon, close to the lows.
Since then, Trump’s pause on tariffs and potential for commerce offers that ease the tariffs’ chunk have helped gasoline a dramatic restoration, lifting the S&P 500 by 20%.
Extra Financial Evaluation:
The outcome has been a nausea-inspiring curler coaster journey for buy-and-hold buyers.
That is been significantly true for Tesla (TSLA)  shareholders. The EV firm rallied after Trump’s election amid hope that Musk’s White Home connections would pave the best way to gross sales development. As an alternative, Musk’s DOGE efforts, and arguably controversial political feedback, prompted a mass exodus of left-leaning Tesla consumers.
Gross sales cratered in key markets, together with Europe and California, the most important U.S. auto market. In Europe, Tesla gross sales dropped 49% year-over-year in April to 7,261 automobiles, in accordance with the European Vehicle Producers’ Affiliation. In California, Tesla registrations fell 21.5% year-over-year within the first quarter, whereas non-Tesla electrical automobile (EV) registrations grew 14%.
Tesla’s inventory value obtained hammered in consequence, falling 54% from mid-December highs to early April lows. It is since recovered alongside the broad market, leaping 35%, largely on information Elon Musk would step away from DOGE.
Doug Kass has seen a factor or two. His profession stretches again into the Seventies at cash supervisor Putnam, together with a stint as analysis director for billionaire Leon Cooperman’s Omega Advisors.
His deep expertise navigating markets professionally means he had a front-row seat to his share of political, financial, and inventory market surprises. He witnessed Richard Nixon’s Watergate implosion, the inflation-riddled 70s, the Financial savings & Mortgage disaster, the Web growth and bust, hanging chads, the housing-bubble-driven Nice Monetary Recession, Trump presidency model 1.0, Covid, and the latest inflation shock and restoration.
Each December, he exams that have together with his “surprises” record for the approaching yr. This yr, along with predicting the S&P 500 sell-off, he forecast the unfriendly finish of the Trump-Musk relationship.
“Shock #2: The ‘different’ romance, between Trump/Musk, would not make it previous spring 2025,” wrote Kass. “Nationwide protests and demonstrations emerge and calls for from a big selection of members of each the Republican and Democratic events (together with conservatives and liberals) name for ‘ousting’ Elon Musk, an unelected official, from enjoying such a dominant function within the U.S. authorities.”
Kass’s Musk prediction is an extended learn, however the gist is easy: Musk and Trump will endure a fallout, which can have penalties for buyers. He revisited his outlook, providing a brand new tackle the Trump-Musk scenario.
“Proper in entrance of us, it’s apparent that political positions of affect can simply be bought-sold by each events (and that actually contains the presidency),” wrote Kass. “I’m not even certain the place the efficiency ends and actuality begins. In the long run (most likely prior to later) — identical to the president’s opening salvos of ridiculously excessive tariff proposals — the 2 actors will seemingly have a detente (and kiss and make up) as a result of the draw back is definite for each of them, as nobody will win. When that make-up occurs, nobody is aware of. It may occur immediately, subsequent week or subsequent month, however the events’ ‘pursuits’ are actually so enmeshed that Musk and Trump acknowledge the place their bread is buttered.”
A possible “easing” of tensions can be welcome, given {that a} long-term tit-for-tat would gasoline market volatility. Nonetheless, Kass’s view of what occurs to the inventory market subsequent is not encouraging.
“By no means in my investing profession has there been so many doable social, political, geopolitical, financial, rates of interest and monetary coverage outcomes (a lot of that are antagonistic). That’s the reason I do not perceive the uber confidence expressed by the Perma Bull cabal (led by Fundstrat’s Tom Lee) and manifested in a near-vertical transfer greater for equities during the last two months,” continued Kass. “With a ahead PE of 22x, equities stay overvalued and, after protecting my Index shorts yesterday, I plan to reshort any rally.”
If Kass is right that instability will pressure shares decrease, how low may it go, and when would possibly issues enhance?
“I see seven lean months forward for our markets. We estimate draw back danger to be roughly 3x the upside reward,” concludes Kass.
