The S&P 500 could face another major downturn if rising oil prices push inflation higher and force the US Federal Reserve to keep raising interest rates. The index last entered bear-market territory in 2022 and 2023, when high inflation led the Fed to aggressively increase interest rates.

Tesla stock could face pressure if rising oil prices trigger inflation and an S&P 500 downturn. (REUTERS)

Rising oil prices are again creating inflation pressure. Higher energy costs can make many goods and services more expensive, making it harder for inflation to cool. The inflation pressure has already contributed to the Fed carrying out a rate hike at its September meeting, according to The Motley Fool.

The S&P 500 is also trading at a very high valuation. Its Shiller CAPE ratio is currently 41.2, making it the second-highest valuation level since the peak of the dot-com bubble in 2000. A high valuation can make the stock market more vulnerable when interest rates rise or economic conditions weaken. The Motley Fool argues that the combination of expensive stocks, higher interest rates and weaker investor sentiment could increase the risk of a sharp S&P 500 decline.

A new S&P 500 bear market could be especially painful for Tesla investors. During the previous bear market, Tesla stock fell 75% from its peak, dropping as low as $108. Tesla could face an even bigger fall this time because its earnings have weakened significantly over the past two years. The company is therefore entering a possible market downturn with a much higher stock valuation relative to its current earnings, The Motley Fool argued.

Also read: Why is oil price rising? Brent jumps 2.5% after Trump rejects Iran peace proposal

These Chinese EV makers are competing with Tesla by offering vehicles with similar features at lower starting prices. Their growth has not been limited to China, as they have also gained ground in important EV markets such as Europe.

Tesla's vehicle sales fell in both 2024 and 2025. Deliveries have recovered in 2026, however, with Tesla delivering 838,149 vehicles in the first half of the year, up 16% from the same period a year earlier, according to The Motley Fool.

The recent recovery in EV demand is not entirely a Tesla-specific success. Rising oil prices are pushing some consumers toward electric vehicles because gasoline and other fuel costs are becoming more expensive. The Motley Fool argued that the wider EV industry is benefiting from this trend.

Tesla has also reduced vehicle prices to attract more buyers. While lower prices can help boost sales, they also put pressure on the company's profit margins. Tesla's earnings have fallen sharply as a result of these pressures. Its trailing 12-month earnings per share dropped from $4.30 to just $1.08 over the past two years.

Despite the fall in earnings, Tesla's stock price remains extremely expensive. Its current price-to-earnings ratio is around 351. That makes Tesla far more expensive than the broader group of major technology companies represented by the Nasdaq-100, which has a P/E ratio of about 34.1. Tesla's P/E is therefore roughly 10 times higher.

This high valuation could become a major problem if the S&P 500 enters another bear market. During market downturns, investors often cut positions in expensive stocks first because they want to reduce risk. Tesla's previous crash shows how quickly its valuation can fall. When the stock dropped to around $108 in late 2022, its P/E ratio fell to about 30.

If Tesla's valuation were to fall back to a similar P/E level, the stock could theoretically lose around 91% from its current level, assuming its earnings do not decline further. That calculation is important because it assumes Tesla's earnings stay where they are now. If earnings fall further, the stock could face additional valuation pressure.

Also read: Why is SpaceX stock up 0.3% as Starship launch targets cheaper Starlink capacity?

Tesla's own artificial-intelligence software vice president, Ashok Elluswamy, said the company's robotaxi program had completed about 380,000 miles of driverless operation across two US states as of June 30. Tesla is still behind Alphabet's Waymo in autonomous-ride operations. Waymo is already completing more than 500,000 paid autonomous trips every week across 15 major US cities.

Tesla's other major future bet, Optimus, is also not ready to become a large commercial business yet. Tesla is still developing its supply chain and working through difficult engineering problems, according to The Motley Fool. Meaningful Optimus production is not expected to begin until 2027 at the earliest, meaning the humanoid robot is unlikely to significantly improve Tesla's earnings in the near term.

Tesla CEO Elon Musk has made much bigger long-term predictions for Optimus. He has said humanoid robots could eventually outnumber humans by 2040. Musk also told investors last year that Optimus could generate more than $10 trillion in revenue for Tesla over the long term.

Those future opportunities are a major reason some investors are willing to pay a premium for Tesla shares today. But the businesses behind those expectations are still developing and are not yet large contributors to Tesla's current revenue.

The EV business could face further pressure as competition increases. More companies are entering the market, which could force Tesla to keep prices competitive and could put further pressure on profit margins. This creates a difficult setup for Tesla if oil prices continue rising and the wider stock market comes under pressure: higher oil prices could support EV demand, but they could also keep inflation elevated and contribute to higher interest rates.

If higher inflation pushes interest rates higher and triggers another S&P 500 downturn, investors could become less willing to pay extremely high valuations for companies whose current earnings are under pressure.

Tesla could therefore face pressure from both sides: its core EV business is dealing with competition and lower margins, while its stock valuation remains extremely high and its future growth businesses are still years away from becoming major revenue drivers.

The Motley Fool's overall argument is that Tesla's combination of weakening earnings, fierce EV competition, very high valuation and dependence on future products could make the stock particularly vulnerable if the S&P 500 enters another bear market.