S&P Global warns the auto industry has a tough road ahead

S&P Global warned that the U.S. auto sector faces limited growth and rising challenges in the next two years amid economic pressures. “We expect limited margin and cash flow improvement in 2025 and 2026 for U.S. auto issuers. Modest credit deterioration in the auto sector is likely; particularly, for some lower-rated auto suppliers,” highlighted S&P Global Ratings Autos Managing Director Nishit Madlani. In particular, increasing unemployment is expected to weigh on consumer purchasing power and limit U.S. auto sales growth to 1% to 2% in 2025 and 2026. S&P expects a 6% to 8% decline in average transaction prices for new vehicles through 2025 as automakers increase incentives and consumers opt for more lower-priced options within segments. After weaker-than-expected sales so far in 2024, battery electric vehicle and plug-in hybrid sales are forecast to improve with many launches at more affordable prices, leading to combined segment market share approaching 20% by the end of 2026.

In terms of earnings, limited margin and cash flow improvement is seen in 2025 and 2026 for U.S. auto issuers due to pressure on automakers and dealers to lower prices, persistently high research and development requirements, and high wage inflation across the sector. S&P’s base-case scenario is for U.S. auto sales to remain flat in 2024 at around 15.5 million units, and grow 1% to 2% in 2025.

The view from S&P on the electric vehicle part of the auto industry is also cautious. “Following a slowdown in market share gains for EVs and rising inventories for several models, we believe the next wave of buyers will remain more price sensitive and depend on material improvements in battery range, charging infrastructure and technology,” noted the rating agency. S&P sees significant competitive pressure in 2025 and 2026 for all automakers. S&P pointed to the large market share losses this year for Tesla’s (NASDAQ:TSLA) Model 3 despite multiple price cuts. “This could slow revenue growth and delay profitability parity for EVs relative to legacy products possibly beyond 2027, especially for issuers that do not achieve economies of scale,” warned S&P.

Auto stocks: Toyota (NYSE:TM), Tesla (TSLA), General Motors (NYSE:GM), Honda (NYSE:HMC), Ferrari (RACE), Ford (F), Hyundai (OTCPK:HYMTF), Nissan (OTCPK:NSANY), Mercedes-Benz (OTCPK:MBGAF), Volkswagen (OTCPK:VLKAF), BMW (OTCPK:BMWYY), Stellantis (STLA), Rivian Automotive (RIVN), and Subaru (OTCPK:FUJHY).