Auto Stocks Brace for Earnings Amid Trade War Uncertainty

Investors eye quarterly results as tariff tensions and global competition cloud sector’s rally

Automakers and their suppliers, caught in the crosshairs of President Donald Trump‘s trade policies, are poised to reveal whether recent earnings can justify a significant market rebound. Stocks in the sector have surged, but clarity on trade remains elusive as profit reports loom.

A Sector in Flux

US auto and supplier stocks have climbed over 40% from April lows, outperforming the broader S&P 500’s 26% gain. Similarly, the MSCI World Auto and Components Index saw a 30% advance, besting the MSCI World Index’s 25% rise. This recovery followed a pause in aggressive tariffs, but the outlook is now clouded by increasing costs and global competition, particularly from Chinese brands.

“Auto stocks have bounced back, but the setup into earnings is murky,” stated Keith Lerner, co-chief investment officer at Truist Advisory Services. He advised a focus on selectivity rather than broad sector exposure.

Key Earnings on the Horizon

Companies like General Motors, Tesla, and Volkswagen are set to release their second-quarter earnings reports soon. Following them will be Ford Motor Co., Stellantis NV, Mercedes-Benz Group AG, and BMW AG. Major global players such as Toyota Motor Corp. and Geely Automobile Holdings Ltd. will report next month.

Navigating Tariff Headwinds

The period under review for most companies includes a stretch where President Trump enacted tariffs on various imports. While many measures have been paused, recent announcements of tariffs on copper and ultimatums to trading partners like Japan, Brazil, the EU, and Mexico have reintroduced uncertainty. Auto firms, with their complex global supply chains, are particularly vulnerable to these trade policy shifts.

“It is a fluid situation still and investors were not really prepared for the latest round of tariffs that were announced earlier this month,” commented Garrett Nelson, an analyst at CFRA Research, who maintains a neutral stance on the US auto sector due to valuation and tariff concerns.

Analyst expectations for some major automakers have been revised downwards. Bloomberg Intelligence data shows that average second-quarter profit estimates for GM have fallen 18% and for Ford have dropped 30% over the past six months. Tesla’s estimates have seen an even steeper decline of 47%, compounded by the impending expiration of a federal tax credit for electric vehicles in September.

A Bank of Japan report indicated that Japanese automakers have reduced export prices to the US, signaling a willingness to sacrifice profits for competitiveness. Toyota is expected to weather the storm better than some domestic rivals due to its strong profitability, while Honda may benefit from its extensive local manufacturing operations.

European Automakers Face Challenges

In Europe, the situation appears more challenging. Volkswagen’s US sales declined 16% in the second quarter, a stark contrast to the 4.4% growth seen earlier in the year. Sweden’s Volvo Car AB announced a $1.2 billion impairment charge due to production delays and rising tariff costs, with its CEO urging the EU to lower tariffs on US imports to facilitate trade agreements.

The Stoxx 600 Automobiles and Parts index has lagged behind the broader European market’s recovery since April, highlighting the sector’s specific headwinds.

“The European mass-market players will be fighting for their piece of a pie that is pretty much stable, or unchanging, over the medium- to longer-term, with more competitors,” observed Rella Suskin, an analyst at Morningstar Inc. “So someone’s got to lose share somewhere.”

China: A Difficult Market for Foreign Brands

Weakness in China has emerged as a significant concern for European carmakers. Domestic competitors are intensifying their presence in one of the world’s largest auto markets. Porsche AG reported a 6% drop in global deliveries for the first half of the year, citing fierce competition in China and slowing momentum in the US.

BMW AG’s sales stagnated in the second quarter, with deliveries in China falling, while Mercedes-Benz Group AG experienced declines in both US and Chinese markets. Alex Potter, an analyst at Piper Sandler, noted that China is becoming a “lost cause for all foreign brands, except for Tesla.”

The rise of Chinese electric vehicle (EV) manufacturers like Geely is also impacting BYD, China’s leading automaker. The Chinese government has pledged to curb “irrational competition” in its EV sector following price cuts by automakers like BYD aimed at attracting consumers.

Suppliers Show Resilience

In contrast to automakers, auto parts suppliers appear to be a more promising segment for investors. While car manufacturers face pressure to absorb tariff-related costs, suppliers are demonstrating an ability to pass these expenses along. In Europe, tiremakers like Michelin are particularly favored by analysts for their success in raising prices to offset US tariff costs, a trend reflecting an early pass-through to consumers, according to Citigroup Inc.