The Zacks Domestic Auto industry’s prospects are promising. The U.S. auto market is poised for another year of growth, building on its steady recovery since 2022. New car sales are expected to rise to 16.3 million units in 2025, marking the third consecutive year of gains, driven by improving affordability, robust demand for hybrids and aggressive promotional incentives. The electric vehicle (EV) segment continues to gain traction, fueled by growing consumer interest and an expanding model lineup, though potential policy shifts could introduce some uncertainty. However, rising discounts aimed at spurring sales are squeezing profit margins, adding a layer of complexity to the otherwise upbeat outlook. To capitalize on the industry's strengths, stocks like General Motors GM and Blue Bird Corporation BLBD stand out as top picks.

Industry Overview

The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and provides employment to a large number of people — is at the forefront of innovation, courtesy of its nature and the transformation that it is going through. The widespread usage of technology and rapid digitization are resulting in a fundamental restructuring of the automotive market. Several companies in the industry have engine and transmission plants and conduct research and development, and testing of electric and autonomous vehicles.

Factors to Shape the Industry's Prospects

Auto Sales on a Growth Trajectory: The U.S. auto industry demonstrated resilience in 2024, continuing its recovery from the 2022 low. With restocked inventories, rising demand for hybrids and aggressive promotional incentives, new car sales climbed to 15.9 million units in 2024, reflecting a 2.2% year-over-year rise, per Wards Intelligence. The year 2025 is expected to sustain this momentum, with projections of 16.3 million units being sold, implying a 3% increase and marking the third consecutive year of growth, according to Cox Automotive. Factors like improving affordability and a healthier economic environment are anticipated to drive this upward trend, signaling a brighter outlook for the U.S. auto market.

EV Growth to Continue Amid Policy Risks: In 2024, 1.3 million battery electric vehicles (BEVs) were sold. In the United States, one in four vehicles sold in 2025 is projected to be electrified, with pure electric cars accounting for about 10% of total sales, per Cox Automotive. This growth will be fueled by increased consumer interest, a widening variety of EV models and growing awareness of sustainability. However, political and policy shifts could introduce uncertainty. With Donald Trump set to resume presidency next week, there are concerns about potential rollbacks of EV tax credits and emissions standards.

Discount Wars May Clip Margins: Ample inventory levels and high vehicle prices have pushed automakers to intensify their promotional efforts. As of December, new-vehicle prices reached $49,740, just shy of the 2022 record, while incentives surged 44% year over year to an average of $3,958, accounting for 8% of the average transaction price (ATP). Electric vehicle (EV) incentives were even more pronounced, exceeding 12% of ATP for six consecutive months. While these discounts have successfully stimulated demand and bolstered sales, they might put pressure on profit margins, raising concerns about the sustainability of these aggressive strategies amid evolving market dynamics.

Zacks Industry Rank is Favorable

The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% of 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential.

We have highlighted a couple of stocks from the industry that you should add to your portfolio. Before that, let's take a look at the industry’s stock market performance and current valuation.

Industry Tops Sector and S&P 500

The Domestic Auto industry has outperformed the Zacks S&P 500 composite and sector over the past year. The industry has rallied 50% compared with the sector and S&P 500’s growth of 28.4% and 24.4%, respectively.

One-Year Price Performance

Industry's Current Valuation

Since automotive companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio. On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 40.62X compared with the S&P 500’s 18.23X and the sector’s 21.39X. Over the past five years, the industry has traded as high as 62.52X, as low as 10.06X and at a median of 25.43X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

2 Stocks to Buy

General Motors: It is the top-selling automaker in the United States, with a compelling portfolio and a strong demand for its quality pickups and SUVs. GM sold 2.7 million vehicles in 2024, a 4.3% increase year over year, with all four key brands—Chevrolet, GMC, Buick, and Cadillac—posting solid gains. The company’s cost-cut efforts are praiseworthy.  GM had total automotive liquidity of $40.2 billion as of Sept. 30, 2024. The company’s aggressive buyback plans instill optimism. Buoyed by strong results in the first three quarters of 2024, continued strength in vehicle demand and cost management, GM lifted its full-year 2024 outlook. It is advancing well in its electrification journey. The company aims to improve sales and profitability in its EV business by reducing battery costs, introducing new models and expanding its scale.

The Zacks Consensus Estimate for General Motors’ 2025 earnings suggests year-over-year growth of 4%. Over the past 30 days, EPS estimates for 2025 have moved up 10 cents to $10.75. GM surpassed earnings estimates in each of the trailing four quarters, with the average surprise being 16.5%. The stock sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: GM

Blue Bird: This century-old school bus manufacturer has successfully expanded into alternative fuels and EV technologies. The company is well-positioned to benefit from the rising demand for electric school buses. Alongside battery-electric models, Blue Bird offers gasoline and propane buses, with propane recognized for its ultra-low emissions. Blue Bird’s focus on improving operations, boosting production efficiency and increasing new orders has driven strong results. The company reported record fiscal 2024 results and lifted its fiscal 2025 forecast. With a backlog of 4,800 units and initiatives like EV upgrades and quality improvements, Blue Bird continues to capitalize on robust market demand. 

The Zacks Consensus Estimate for Blue Bird’s fiscal 2025 sales and earnings suggests year-over-year growth of 11% and 12%, respectively. EPS estimates for fiscal 2025 have moved up 18 cents to $3.88 over the past 60 days. BLBD surpassed earnings estimates in three of the trailing four quarters and missed once, with the average surprise being 85%. The stock sports a Zacks Rank #1.

Price & Consensus: BLBD

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