Why Shares of Tesla Are Sinking Today

Shares of Tesla (NASDAQ: TSLA) traded 4% lower as of 1:56 p.m. ET, along with the broader market and as the electric vehicle maker had to recall hundreds of thousands of vehicles. The Dow Jones Industrial Average had tanked nearly 700 points, while the Nasdaq Composite had fallen over 1.6%.

Investors are officially concerned about the consumer

Markets sold off intensely again today due to concerns about the consumer. Earlier this week, Walmart, a proxy for the consumer, issued weaker-than-expected guidance.

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The release of the University of Michigan's consumer sentiment index this morning only exacerbated these concerns. In January, the index dropped 10% to 64.7, a bigger decline than expected. Consumers' five-year expectations for inflation came in at 3.5%, the highest level seen since 1995. The market has recently looked past a higher-for-longer rate environment, driven by sticky inflation, but weakness in the economy has proven to be a touchy subject. After all, consumer spending makes up more than two-thirds of gross domestic product.

In company-specific news, Tesla recalled over 375,000 of its vehicles. The National Highway Traffic Safety Administration attributed the recall to steering issues in some Model 3 and Model Y vehicles from 2023 operating an older software version. Tesla does not know of any accidents associated with the issue and rolled out a free software update to correct the problem.

Richly valued stocks could be vulnerable

Tesla has struggled in 2025 but outperformed overall since President Donald Trump won the election. Analysts are still split on the stock. Longtime bull and Wedbush analyst Dan Ives recently reiterated his outperform rating, citing key catalysts such as new vehicle launches on the horizon. Meanwhile, longtime bear Gordon Johnson of GLH Research sees a potentially disastrous upcoming quarter, with sales in the first quarter of 2025 down significantly in China and in several European countries.

I generally try to avoid stocks with expensive valuations, especially with uncertainty ahead. With Tesla trading at 120 times forward earnings, I am staying away for now.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla and Walmart. The Motley Fool has a disclosure policy.