What happened

Shares of electric vehicle maker Lucid Group (NASDAQ: LCID) were rising Tuesday as investors regained some optimism about EV stocks generally in the wake of a report that Tesla‘s recent sales in China were strong. Additionally, investors are betting the Federal Reserve will raise the benchmark federal funds rate by just 25 basis points (0.25 percentage points) at its meeting this week. That would be the same size as the boost it implemented on Feb. 1, but that last hike was its smallest interest rate increase since March 2022.

Lucid’s share price was up by 6.9% as of 12:30 p.m. ET.

So what

Lucid — like many EV stocks — has fallen pretty hard in the past year as investors have considered how rising interest rates, high inflation, and growing competition will impact the EV market. But investors may have regained some of their enthusiasm for Lucid stock after seeing a new report from China Merchants Bank International showing that Tesla may have had one of its best quarters yet in China.

The bank estimates that Tesla’s retail sales in the country averaged 1,371 vehicles per day in the first quarter, up from 1,327 vehicles per day in the fourth quarter. While Tesla hasn’t confirmed the numbers, Lucid investors may be latching onto the news as a sign that EV demand is still high.

Lucid doesn’t sell its vehicles in China yet, but many EV stocks are influenced by what Tesla’s share price is doing.

Adding to the positive sentiment among Lucid investors Tuesday is the hope that the Federal Reserve will increase the federal funds rate by just 25 basis points at its meeting Wednesday. In its efforts to cool down inflation, the Fed has aggressively hiked interest rates from the extremely low levels they were held at during the pandemic, but recent problems in the financial sector may have thrown a wrench into its plans.

Higher interest rates have made it more expensive for companies like Lucid to borrow money, and the Fed’s fiscal tightening could end up slowing the economy down too much, further hindering Lucid’s growth prospects. So any indication that the Fed may slow the pace of its rate hikes will make investors more optimistic about the EV maker’s outlook.

Now what

Investors are likely hoping that the Fed will continue to slow down its rate-hiking in the coming months, and possibly even pause it altogether. That hope, mixed with Tesla’s positive news, is generating some positivity among investors about Lucid Tuesday.

But there’s no guarantee that Tuesday’s gains will persist. There is still a lot of volatility in the broader market — and especially with EV stocks — so any gains Lucid makes could quickly be reversed.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.