Put two mercurial personalities in the room, add competing goals and a hefty dose of media pressure, and what do you get? Let’s just say that the high-profile friend-to-foe saga isn’t overly surprising.
Elon Musk and Donald Trump are polarizing figures with a penchant for dropping verbal bombshells, and that was particularly evident this week as the two sparred over the Big Beautiful bill, electric vehicle credits, and debt.
The rift may shock some, however, given how closely Musk and Trump worked together over the past year.
Musk spent hundreds of millions helping elect Donald Trump as president, and Trump rewarded Musk with a high-profile role in his administration as the head of the Department of Government Efficiency, or DOGE. Trump even went so far as to host a Tesla showroom on the White House lawn to support Musk after Musk’s political activism caused a drop in Tesla’s sales.
One person who wasn’t the least bit surprised by the high-profile dust-up was veteran hedge fund manager Doug Kass. Back in December, Kass picked the break-up as one of his top 15 surprises for 2025.
It was far from the only correct forecast for Kass. He also predicted a stock market reckoning could cause the S&P 500 to fall 15%, and in April, he accurately forecast that stocks would find their footing after the brutal sell-off.
Kass recently revisited his take on Musk and Trump, and how stocks may react to their fallout. His S&P 500 outlook may disappoint many, while his take on Trump and Musk might surprise most.
Hedge fund manager Doug Kass predicted Elon Musk’s relationship with President Donald Trump would sour. Kass updated his outlook on the S&P 500 after the high-profile spat between the mercurial leaders.Image source: TheStreet
After back-to-back 20% gains in the S&P 500 in 2023 and 2024, including an impressive 24% return last year, investors may have complacently expected more good times in 2025.
Then reality set in. The stock market has whipsawed amid a series of shocks, many delivered by President Trump and Elon Musk, via his high-profile and much-debated cost-cutting at DOGE.
Stocks came into 2025 arguably priced to perfection. Optimism for a friendly Federal Reserve shift in monetary policy to dovish interest rate cuts and a flood of artificial intelligence spending fueled big returns last year, pushing the S&P 500’s price-to-earnings ratio north of 22.
Historically, returns following high P/E ratios have been largely lackluster. That point wasn’t lost on Kass, who correctly said in December that the S&P 500 could drop 15% in 2025.
Stocks tend to produce lackluster returns in the following year when the S&P 500 p/e ratio exceeds 20.Image source: TheStreet
“Surprise #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 continuously through February, when the S&P 500 reversed after hitting all-time highs. From mid-February through early April, bombshells in the form of shockingly high tariff announcements from President Trump and job losses stemming from Musk’s DOGE efforts caused the benchmark index to plummet. At its worst, the S&P 500 fell 19%, while the tech-heavy Nasdaq fell about 24%.
The sharp drop was painful, and many hit the sell button, worried that an endless stream of uncertainty would cause even greater losses. Kass, however, correctly reversed course, making bargain-basement buys on the indexes and tech leaders, including Amazon, near the lows.
Since then, Trump’s pause on tariffs and potential for trade deals that ease the tariffs’ bite have helped fuel a dramatic recovery, lifting the S&P 500 by 20%.
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The result has been a nausea-inspiring roller coaster ride for buy-and-hold investors.
That’s been particularly true for Tesla (TSLA) shareholders. The EV company rallied after Trump’s election amid hope that Musk’s White House connections would pave the way to sales growth. Instead, Musk’s DOGE efforts, and arguably controversial political comments, caused a mass exodus of left-leaning Tesla buyers.
Sales cratered in key markets, including Europe and California, the largest U.S. auto market. In Europe, Tesla sales dropped 49% year-over-year in April to 7,261 vehicles, according to the European Automobile Manufacturers’ Association. In California, Tesla registrations fell 21.5% year-over-year in the first quarter, while non-Tesla electric vehicle (EV) registrations grew 14%.
Tesla’s stock price got hammered as a result, falling 54% from mid-December highs to early April lows. It’s since recovered alongside the broad market, jumping 35%, largely on news Elon Musk would step away from DOGE.
Doug Kass has seen a thing or two. His career stretches back into the 1970s at money manager Putnam, including a stint as research director for billionaire Leon Cooperman’s Omega Advisors.
His deep experience navigating markets professionally means he had a front-row seat to his share of political, economic, and stock market surprises. He witnessed Richard Nixon’s Watergate implosion, the inflation-riddled 70s, the Savings & Loan crisis, the Internet boom and bust, hanging chads, the housing-bubble-driven Great Financial Recession, Trump presidency version 1.0, Covid, and the recent inflation shock and recovery.
Every December, he tests that experience with his “surprises” list for the coming year. This year, in addition to predicting the S&P 500 sell-off, he forecast the unfriendly end of the Trump-Musk relationship.
“Surprise #2: The ‘other’ romance, between Trump/Musk, doesn’t make it past spring 2025,” wrote Kass. “National protests and demonstrations emerge and demands from a wide array of members of both the Republican and Democratic parties (including conservatives and liberals) call for ‘ousting’ Elon Musk, an unelected official, from playing such a dominant role in the U.S. government.”
Kass’s Musk prediction is a longer read, but the gist is simple: Musk and Trump will suffer a fallout, which may have consequences for investors. He revisited his outlook, offering a new take on the Trump-Musk situation.
“Right in front of us, it is obvious that political positions of influence can easily be bought-sold by both parties (and that certainly includes the presidency),” wrote Kass. “I am not even sure where the performance ends and reality begins. In the end (probably sooner than later) — just like the president’s opening salvos of ridiculously high tariff proposals — the two actors will likely have a detente (and kiss and make up) because the downside is certain for both of them, as no one will win. When that make-up happens, no one knows. It could happen today, next week or next month, but the parties’ ‘interests’ are now so enmeshed that Musk and Trump recognize where their bread is buttered.”
A potential “easing” of tensions would be welcome, given that a long-term tit-for-tat would fuel market volatility. Still, Kass’s view of what happens to the stock market next isn’t encouraging.
“Never in my investing career has there been so many possible social, political, geopolitical, economic, interest rates and fiscal policy outcomes (many of which are adverse). That is why I don’t understand the uber confidence expressed by the Perma Bull cabal (led by Fundstrat’s Tom Lee) and manifested in a near-vertical move higher for equities over the last two months,” continued Kass. “With a forward PE of 22x, equities remain overvalued and, after covering my Index shorts yesterday, I plan to reshort any rally.”
If Kass is correct that instability will force stocks lower, how low could it go, and when might things improve?
“I see seven lean months ahead for our markets. We estimate downside risk to be roughly 3x the upside reward,” concludes Kass.
