Solar stocks plunge on Senate bill's tax-credit phase-out, but analysts say investors should be happy

Solar stocks, including Enphase Energy and First Solar, plummeted after the Senate proposed phasing out solar tax credits by 2028, outlined in President Trump's budget bill; Enphase and First Solar dropped 24.2% and 19.6% respectively. Despite the initial negative market reaction, analysts at J.P. Morgan and Mizuho view the Senate's version as more favorable than the House's, citing provisions like extended construction timelines for full tax credit eligibility and the preservation of credits for residential solar-power purchase agreements, which should provide strong project visibility through the end of the decade.

Analysis

Solar sector equities experienced a significant downturn, with Enphase Energy (ENPH) and First Solar (FSLR) declining by 24.2% and 19.6% respectively, and Sunrun (RUN) and SolarEdge (SEDG) plummeting 42.7% and 37.7%, following the U.S. Senate's proposal to phase out solar tax credits by 2028 under President Trump's budget plan. This proposed phase-out targets credits established by the Inflation Reduction Act. Despite the sharp negative market reaction, which also saw the iShares Global Clean Energy ETF (ICLN) fall 4.3% after a recent 6.8% rally, analysts from J.P. Morgan and Mizuho perceive the Senate's bill as more advantageous for the solar industry than the House's version passed in late May. J.P. Morgan's Mark Strouse highlighted that the Senate proposal provides a "workable" framework with extended timelines for project completion to access tax credits—full credit for projects starting before end-2025 and partial for those in 2026—ensuring "strong project visibility through the end of the decade." Mizuho's Maheep Mandloi noted successful industry lobbying, pointing to retained credits for residential solar-power purchase agreements and the reinstatement of full-term manufacturing credits, viewing the Senate Finance Committee draft as "positive for all names in our coverage." The initial market volatility, reflected in the negative per-ticker sentiment for ENPH (-0.3) and FSLR (-0.2), is attributed by J.P. Morgan to "dashed hopes for greater renewables support," though the underlying legislative details suggest a more stable operational runway than initially feared, despite the market impact score of 0.65 indicating significant market movement.

Key Decisions for Investors

• Evaluate the recent sharp sell-off in solar equities, such as ENPH and FSLR, as a potential overreaction, considering analyst views that the Senate's proposed tax credit phase-out offers a more favorable and predictable environment than previously anticipated by the House bill.
• Focus on companies with strong project pipelines that can leverage the Senate bill's extended construction timelines for tax credit eligibility, which analysts suggest could offer project visibility through the end of the decade.
• Closely monitor the final legislative outcome of the budget bill, as specific details regarding the preservation of credits for residential solar-power purchase agreements and manufacturing incentives will be critical determinants for the sector's profitability and individual company performance.