Source: Zhitong Finance

Solar stocks have been hit by falling prices, tariffs, and rising borrowing costs, and will face another potential threat in the coming months: Donald Trump.

In 2016, Trump unexpectedly won, and the global solar stock index fell 45% that year. In 2020, as Joe Biden won the US presidential election, this benchmark index more than tripled.

In fact, the issues facing solar energy companies are more pressing than who will join the White House, including the Federal Reserve's interest rate path, price pressure, and geopolitical tension. But in the market, emotions often play a dominant role.

“Investors' opinions played a greater role than actual fundamental results,” said Sophie Karp, a utilities analyst at KeyBanc Capital Markets. “In the end, the Trump administration did not have negative fundamental consequences for them.”

That hasn't stopped solar stocks from selling off. The MAC Global Solar Index has weakened over the past 12 months as Trump's chances of returning to the White House have risen. Since this year, residential solar installation companies$Sunnova Energy International (NOVA.US)$It's already down about 60%,$Sunrun (RUN.US)$fell 33%,$SolarEdge Technologies (SEDG.US)$Decreased by 24%.

Solar stocks plummet as Trump's chances of election rise

Solar energy companies are “under a lot of pressure”

“Awareness of risk will be enough to limit the upside of such stocks in election year,” Karp said. The trend of solar energy stocks after the election is also difficult to predict.

Take this election, for example. Less than three months after Biden's victory in 2020, the MAC Global Solar Index hit a high of about 12 years before beginning to decline for many years.

Rene Reyna, head of themed product strategy at Invesco ETF, said this is because prices are ahead of fundamentals.

The Federal Reserve then began raising interest rates. Smaller, growth-oriented companies are feeling the pressure as they rely on constant refinancing.

Higher interest rates and inflation have curtailed homeowners' interest in buying commodities such as solar panels, while oversupply of equipment depresses prices and drains businesses of cash.

“This context — interest rates, oversupply, and continued falling prices — has been the biggest challenge and greatest pressure we've seen in the solar sector,” Reyna said.

As the company tried to lower costs and improve its balance sheet, layoffs followed.

Taxes and duties

Investors are most concerned that if Trump is re-elected and the Republican Party takes control of Congress, the laws against climate change enacted during Biden's administration — mainly the 2021 Infrastructure Investment and Jobs Act (IIJA) and the 2022 Inflation Reduction Act (IRA) — could be reversed.

Bloomberg Intelligence senior energy analyst Rob Barnett said these concerns were wrong.

“The IRA is unlikely to be a priority for future presidents, even if a Republican president takes office, even if they base their campaign on it,” Barnett said. Trump promised to repeal the Affordable Care Act in 2016, but he didn't deliver on it.

Solar energy companies have used IRA tax incentives to establish manufacturing plants in the US, thereby bringing employment opportunities to the local community. Barnett added that this made it harder for Republicans to advocate repealing the IRA bill.

Tariffs and trade barriers are also top concerns for investors. Manufacturers are likely to face higher tariffs on parts. However, Keybanc's Karp expects that since parts are already priced so low, the impact of additional tariffs will be minimal.

Interest rate cycle

The solar industry is struggling to recover. Investors' confidence that interest rates will be lowered fueled the rebound in the fourth quarter.

However, the Federal Reserve kept the target interest rate unchanged at the March meeting. Investors currently expect that the Federal Reserve may not cut interest rates until June. This will limit the rise of these stocks, especially as the sector's growth expectations are limited, and earnings per share are expected to fall by nearly 12% this year.

For investors willing to adopt a long-term investment strategy, the recent slump will only make it less expensive to enter the industry. The price-earnings ratio of the MAC Global Solar Index is currently around 23, below its peak of nearly 60 in early 2021, while analysts expect earnings per share to grow 148% in 2025.

“Under Trump, the number of new solar and wind energy additions in the US continues to grow, and under Biden, this number continues to grow,” Barnett said. “I believe America's solar and wind energy industry will continue to grow no matter who becomes president in the next four years.”