(Bloomberg) -- Solar stocks, already battered by falling prices, tariffs and rising borrowing costs face another potential threat over the coming months: Donald Trump.

In 2016 — a year that culminated in Trump’s surprise victory — a gauge of global solar stocks tumbled 45%. In 2020, the benchmark more than tripled as Joe Biden secured the presidential election. After three years of losses, the current election cycle promises more stomach-churning moves. 

In reality, solar companies face more pressing problems than who sits in the White House, including the Federal Reserve’s interest-rate path, pricing pressures and US-China trade relations. But in markets, sentiment often rules. 

“The investor perception played a greater role than the actual fundamental outcome,” said Sophie Karp, a utility analyst at KeyBanc Capital Markets. “There was no negative fundamental outcome for them ultimately from the Trump administration the first time around.” 

That has done little to stop the solar selloff. The MAC Global Solar Energy Index has weakened over the past 12 months as the prospects of former President Trump returning to the Oval Office grow. Residential solar installer Sunnova Energy International Inc. has already seen its value drop roughly 60% so far this year, while peer Sunrun Inc. and SolarEdge Technologies Inc., a supplier, have both dropped by more than 20%.

Appearance Matters 

“The perception of risk will be enough to cap the upside on this sector in the election year,” said Karp. The aftermath may prove harder to predict.

Take the last election. Less than three months after Biden’s victory in 2020, the MAC Global Solar Energy Index hit a roughly 12-year peak before kicking off a multi-year descent. 

That’s because prices got ahead of fundamentals, according to Rene Reyna, head of thematic product strategy for Invesco’s ETFs including the Invesco Solar ETF.

Then the Fed started raising interest rates. The smaller, growth-oriented companies — reliant on constant refinancing — felt the pinch. Higher rates and inflation capped homeowners’ interest in big purchases like solar panels, while an equipment supply glut drove down prices, draining firms of cash.

“That backdrop — interest rates, excess supply while prices continue to drop — has been the biggest challenge, the biggest pressure to the solar space that we’ve seen,” Reyna said.

Layoffs followed as companies tried to reduce costs and improve balance sheets.

Taxes and Tariffs

At the forefront of investor worries are laws addressing climate change enacted during the Biden administration — chiefly the Infrastructure Investment and Jobs Act (IIJA) in 2021 and Inflation Reduction Act (IRA) in 2022 — and the threat of a reversal if Trump returns to office and Republicans control Congress.

Those fears are misguided, according to Rob Barnett, a senior energy analyst at Bloomberg Intelligence.

“The IRA is unlikely to be a priority for the future president, even a Republican one, even if they campaign on it,” Barnett said, pointing to Trump’s 2016 promise to repeal the Affordable Care Act, which he failed to do.

Solar companies taking advantage of IRA tax incentives have built manufacturing facilities in the US, in turn bringing in local jobs. That’s making it harder for Republicans to argue for a rollback, he added.

Tariffs and trade barriers between the US and China are also top of mind for investors. Both parties have been increasing their scrutiny of China, meaning there’s a risk no matter the election result.

Manufacturers could face higher tariffs on parts, while installers could even be prohibited from importing any solar equipment from China. At Invesco Reyna says companies are trying to reduce their dependency on China while Keybanc’s Karp expects the impact of additional tariffs to be minor as components pricing is already so low. 

Rates Cycle

The sector has made attempts to recover. A fourth-quarter rebound was fueled by investor confidence that interest rates would improve.

“We saw some of these small-cap clean energy companies start to trade like rates were going to fall and financing costs were going be reduced and therefore improve dynamics,” Reyna said. 

Instead, the Fed left its target rate unchanged during its March meeting. Investors are now anticipating a rate cut may not materialize until June. That will keep a lid on the stocks, especially as growth expectations for the sector are capped, with earnings per share expected to decline nearly 12% this year.

For investors willing to take a longer-term approach, the latest rout has only made it more affordable to get into the sector. The price-to-earnings ratio of the MAC Global Solar Energy Index is now around 23, down from a peak of nearly 60 in early 2021, while analysts are predicting an estimated 148% surge in 2025 EPS.

“The amount of solar and wind additions in the US was growing under Trump, it has continued to grow under Biden,” according to BI’s Barnett. “My belief is that no matter who the president is over the next four years, both the solar and wind industries will continue to grow in the US.” 

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