Carmakers face uncertainty as tariffs and earnings collide
A gauge of stocks of U.S. carmakers and suppliers has soared more than 40% from its tariff-fueled April depths, handily beating the S&P 500 Index's 26% gain. Meanwhile, the MSCI World Auto and Components Index has climbed 30% in that period, outpacing the MSCI World Index's 25% advance.
Investors dove into the beaten-down shares during the furious rally unleashed when Trump paused most of his aggressive levies in April. But the recovery, which has since stalled out, creates a conundrum: While the shares are now much more costly, the tariff outlook hasn't grown much clearer as the sector gets ready to announce quarterly profits starting next week.
Add to that headwinds around the affordability of new vehicles, rising global competition from Chinese brands like BYD Co., and China's efforts to regulate the sector, and some analysts are wary of making broad bets on the industry at the moment.
'Auto stocks have bounced back, but the setup into earnings is murky,' said Keith Lerner, co-chief investment officer at Truist Advisory Services. 'This is a market for selectivity, not broad exposure.'
General Motors Co., Tesla Inc. and Volkswagen AG release earnings next week, with Ford Motor Co., Stellantis NV, Mercedes-Benz Group AG and BMW AG coming the week after. Japan's Toyota Motor Corp., the world's No. 1 carmaker, and China's Geely Automobile Holdings Ltd. are due to report next month.
Most companies are poised to announce numbers for the three months through June — after a stretch in which Trump unveiled a slew of tariffs on auto imports, goods from Mexico and Canada, steel and aluminum and nearly all U.S. trading partners. Many of the measures have been paused, but this month brought a fresh blow as Trump announced tariffs on copper and unleashed ultimatums on counterparts including Japan, Brazil, the European Union and Mexico.
The impact of the potential tariff regime on automakers, which have a sprawling global supply chain and are uniquely exposed to the risk, is a key theme investors and analysts will be watching.
'It is a fluid situation still and investors were not really prepared for the latest round of tariffs that were announced earlier this month,' said Garrett Nelson, an analyst at CFRA Research. He has a hold-equivalent rating on the U.S. auto sector, citing valuations and tariff-related uncertainty among other reasons.
Wall Street is already lowering expectations for some of the biggest carmakers. Analysts' second-quarter average profit estimate for GM has dropped 18% over the past six months and Ford's has sunk 30%, according to Bloomberg Intelligence.
For EV giant Tesla it's declined 47% over the same period, with a potential hurdle looming as a federal tax credit for consumer purchases of electric vehicles ends in September.
The overarching question is how companies are handling tariff-triggered cost increases.
A Bank of Japan report this month showed the country's automakers slashed prices of exports to the U.S. — a sign they were sacrificing profits to stay competitive. Industry analysts expect Toyota to fare better than its domestic peers given its sizable profits, and see Honda Motor Co. benefiting from extensive local manufacturing.
Volkswagen's sales dropped 16% in the U.S. in the second quarter, a sharp reversal from the 4.4% growth in the first three months of the year before the new levies took effect. This week, Sweden's Volvo Car AB said it was taking an impairment charge of about $1.2 billion due to delays to some electric models and climbing tariff costs. Its CEO on Thursday urged the EU to cut tariffs on the U.S. to help a trade deal.
In contrast to the U.S. sector's performance, the Stoxx 600 Automobiles and Parts gauge of European producers has trailed the rebound in the region's broader Stoxx 600 from an April low.
'The European mass-market players will be fighting for their piece of a pie in a pie that is pretty much stable, or unchanging, over the medium- to longer-term, with more competitors,' said Rella Suskin, an analyst at Morningstar Inc. 'So someone's got to lose share somewhere.'
A fast-emerging theme for European carmakers that have reported sales for the second quarter has been weakness in China — one of the world's largest auto markets — where domestic companies have become tough competitors.
German sportscar maker Porsche AG said its global deliveries fell 6% in the first half of the year, and warned of a difficult road ahead due to fierce competition in China and slowing momentum in the U.S. BMW AG's sales stagnated in the second quarter as deliveries in China dropped, and Mercedes-Benz Group AG's vehicle sales declined in both the U.S. and China.
'China is probably a lost cause for all foreign brands, except for Tesla,' Piper Sandler analyst Alex Potter wrote in a note to clients this month.
The rise of Chinese EV makers such as Geely is also pressuring BYD, the country's top automaker, which saw its domestic passenger car sales decline the past few months. China this week pledged to rein in 'irrational competition' in its EV sector after BYD and other automakers cut prices to lure buyers.
For Wall Street, partsmakers look like a bright spot. With car manufacturers facing intense political pressure to forgo price increases as tariffs hit, auto suppliers are showing signs of being able to pass along that expense.
In Europe, for example, analysts favor tiremakers in particular as the companies successfully raise prices to offset US tariff costs, which Citigroup Inc. says reflects an early pass-through to consumers.
'We think more local players, especially Michelin, can benefit from this trend in a profitable way,' analysts led by Ross MacDonald wrote in a note this week.
Dey, MacDonogh and Yang write for Bloomberg.
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