Subsidy Showdown - Trump-Musk Feud Threatens Billions in EV Incentives and Space Contracts

Subsidy Showdown: Trump-Musk Feud Threatens Billions in EV Incentives and Space Contracts

In a digital broadside that sent tremors through Wall Street and Silicon Valley alike, President Donald Trump launched his most pointed attack yet against former ally Elon Musk, threatening to dismantle the sprawling empire of government subsidies that has helped fuel Tesla's rise and SpaceX's dominance in the aerospace sector.

"Elon may get more subsidy than any human being in history, by far, and without subsidies, Elon would probably have to close up shop and head back home to South Africa," Trump declared Monday evening in a Truth Social post that sent Tesla shares tumbling 2% to $311.19 after hours.

The escalating feud between two of America's most recognizable billionaires has evolved from personal squabbling into a high-stakes policy battle with profound implications for U.S. technological leadership, the green energy transition, and billions in federal spending.

From Endorsement to Enmity: The Crumbling Alliance

Just months after Musk's surprising endorsement helped propel Trump back to the White House, the two men find themselves at loggerheads over the centerpiece of Trump's domestic agenda: the "One Big Beautiful Bill Act" (H.R. 1), which would eliminate up to $191 billion in electric vehicle purchase credits and another $249 billion in clean-energy production incentives over ten years.

"Electric cars are fine, but not everyone should be forced to own one," Trump wrote, reaffirming his campaign promise to dismantle what he characterizes as government overreach into consumer choice.

For Musk, who reportedly deleted and apologized for several critical posts about Trump's proposal, the stakes could hardly be higher. Musk's businesses have secured approximately $38 billion in federal subsidies, grants, and contracts since 2002, with roughly $22 billion representing active multiyear obligations—primarily at SpaceX.

"Perhaps we should have DOGE take a good, hard, look at this? BIG MONEY TO BE SAVED!!!" Trump suggested, referring to the Department of Government Efficiency established by his administration to identify federal spending cuts.

Market Tremors and Whispers of Compromise

The market has already begun pricing in policy risk, with Tesla shedding approximately 14% of its value since the first public salvo on June 5. The company now trades at $317.66, down 19% year-to-date, though options markets suggest investors haven't yet reached panic mode.

"We're seeing a surprisingly measured response in implied volatility," noted a senior derivatives strategist at a major investment bank. "Options are pricing in significant uncertainty, but not catastrophe, which suggests sophisticated investors believe some form of compromise is likely."

Behind closed doors on Capitol Hill, that compromise may already be taking shape. While H.R. 1 passed the House on a party-line vote with the Freedom Caucus's EV language intact, the Senate presents a more complicated picture. With Republicans holding a slim 52-48 majority but facing the prospect of a filibuster, at least eight GOP senators from auto and aerospace states are reportedly uneasy about the bill's sweeping cuts.

The Pentagon's Quiet Concern

Perhaps the most significant barrier to Trump's threats is national security. SpaceX's Falcon rockets and Starship program have become integral to U.S. military readiness and NASA operations. Abruptly terminating these contracts would require invocation of "termination for convenience" clauses and substantial payout penalties.

"The Department of Defense has already begun modeling contingency scenarios," revealed a former Pentagon procurement official speaking on condition of anonymity. "There's simply no alternative launch capability that could replace SpaceX in the near term without compromising mission-critical operations."

This reality has led many analysts to predict that while consumer EV credits might face the chopping block, SpaceX's contracts will likely survive largely intact—potentially offering Trump and Musk a face-saving compromise.

The Bottom Line: Who Pays If Subsidies Vanish?

For Tesla, the stakes are clear: removing the $7,500 tax credit on approximately 600,000 U.S. deliveries would slice revenue by approximately $4.5 billion and EBIT by roughly $2 billion, representing around $0.55-0.60 per share, or 8-9% of 2026 consensus earnings.

The ripple effects would extend far beyond Tesla. Panasonic's Kansas gigafactory could be mothballed, while CATL's Mexico joint venture would become relatively more attractive. Meanwhile, Korean automakers like Hyundai and Kia could gain market share if U.S. credits end while remaining subsidy-eligible in Europe.

"We're already seeing strategic pivots among suppliers," explained an industry consultant tracking EV supply chains. "Companies are quietly developing contingency plans that involve shifting investments to markets with more stable policy environments."

Strategic Plays for Turbulent Times

Professional investors are already positioning for volatility. Delta-hedged option strangles through the July 19 Senate window present an attractive opportunity, with implied volatility ranking below 40%—suggesting underpriced event premium.

Some hedge funds are implementing pairs trades: shorting U.S.-centric auto suppliers with high EV exposure against long positions in Korean OEM ADRs. Others are buying credit default swap protection on small-cap launch companies that could face existential threats if SpaceX contracts pause.

Municipal bond investors are reducing exposure to states that incorporated IRA-driven revenue assumptions into their budgets, while private equity firms are circling potential carve-outs in Tier-2 EV battery suppliers that might be forced to divest U.S. plants.

The Path Forward: Compromise or Confrontation?

As the Senate prepares to take up H.R. 1, three scenarios have emerged. A full repeal (40% probability) would likely push Tesla's fair value toward $265 per share. A partial repeal (35% probability) suggests a fair value around $305, while maintaining the status quo (25% probability) would support a valuation of approximately $345.

"Trump's rhetoric is a bargaining chip, not a blueprint," suggested a veteran policy analyst who has advised multiple administrations. "The Senate will likely pare back the EV-credit repeal to around 50% and grandfather existing consumer commitments."

For investors, the weighted-probability fair value of approximately $297 suggests risk-reward is now symmetric rather than skewed upward. Long-only funds might consider waiting for sub-$285 capitulation or a clear Senate signal before adding to positions.

As this high-stakes game of chicken continues between two of America's most unpredictable business and political figures, one thing remains certain: the outcome will reshape not just the future of electric vehicles in America, but potentially the broader landscape of government support for emerging technologies in an increasingly competitive global environment.

Investment Thesis

Category	Key Points
Legislative & Political Calculus	- House passed H.R. 1 with EV language intact (✔︎). - Senate GOP moderates uneasy (40% odds). - Reconciliation unlikely (10%). - Contract rescission risky (<10%). Opinion: EV credits may be traded for SpaceX continuity.
2025–27 Cash-Flow Exposure	- Tesla: $4.5B EV credits (11% of revenue). - SpaceX: $22B federal contracts (140% of EBITDA). - Starlink: $0.9B state incentives (12% of revenue).
Tesla Earnings Impact (3 Scenarios)	- Full repeal (40%): $265 fair value. - Partial repeal (35%): $305. - Status quo (25%): $345. Stance: Weighted fair value ~$297; wait for better entry.
Pro Investor Playbook	1. Delta-hedged Tesla options. 2. Pairs trade: Short U.S. EV suppliers, long Hyundai/Kia. 3. Buy CDS on SpaceX-dependent launch firms. 4. Shift muni bonds away from EV-heavy states. 5. Target distressed battery suppliers.
Operating Business Implications	- EV supply chains may shift abroad. - DoD may diversify from SpaceX. - Increased audits for federal grant recipients.
Bottom-Line View	EV credits likely cut ~50%, SpaceX contracts safe. Public markets: short-term volatility trade. Strategics: Secure non-U.S. battery supply and diversify launch services.

NOT INVESTMENT ADVICE