Tesla (NASDAQ: TSLA) shares dropped more than 7% intra-day after William Blair downgraded the electric vehicle giant from Outperform to Market Perform. The firm cited growing concerns over policy changes and shrinking regulatory credit revenue, which could significantly impact both demand and profitability.

Analysts highlighted that while the anticipated loss of the $7,500 EV tax credit under the new “Big Beautiful Bill” was already a concern, the unexpected removal of corporate average fuel economy (CAFE) penalties poses an even greater threat. Tesla has historically relied on selling regulatory credits to other automakers, generating over $2 billion in annual profits. With CAFE fines eliminated, this critical revenue stream is now in jeopardy.

Unlike the tax credit, which indirectly affects consumer demand, the loss of regulatory credit income is expected to directly hit Tesla’s bottom line. Analysts across Wall Street are now revising earnings models to account for these challenges. William Blair warned that these combined pressures could lead to further downside for Tesla’s stock, prompting the downgrade as the risk/reward balance becomes less favorable.

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