The Zacks Domestic Auto industry’s outlook remains robust despite rising economic uncertainty. While the newly introduced tariff by President Trump and projected slower economic growth can decelerate the momentum of auto sales, the introduction of affordable EV options is expected to drive the prospects of the industry. Auto players like Tesla, Inc. TSLA, General Motors Company GM and Blue Bird Corporation BLBD are likely to weather the effects of the newly introduced economic policies by minimizing the affordability concerns and catering to a wider customer base.

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 use 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

Higher Tariff to Hurt Margins:In the United States, auto prices are already near record levels. The newly introduced tariff by President Trump will only exacerbate the affordability issues. While many goods may see price hikes, imported cars and auto parts will be hit the hardest and impact millions of buyers. With average new car prices already near $50,000, the tariffs could push costs even higher, making cars less affordable for many Americans. If automakers try to absorb rising costs from tariffs, it will put a strain on their margins.

Economic Uncertainty to Affect Demand:The automotive industry is cyclical, with sales and production fluctuating in response to economic conditions, consumer confidence, technology and regulations. For 2025, the Fed expects slower economic growth, cutting its GDP forecast from 2.1% to 1.7%. It also raised its core inflation estimate to 2.8% from 2.5%, and slightly increased its year-end unemployment projection from 4.3% to 4.4%. Projected slower economic growth is likely to take a hit on the demand of the highly cyclical automotive industry.

Affordable EVs to Entice Buyers:Despite rising tariffs and economic uncertainty casting doubt on the auto industry’s outlook, the arrival of more affordable EVs is expected to attract buyers. So far, most electric vehicles in the United States have been priced at the premium end, which is out of reach for many consumers. However, automakers are now focusing on budget-friendly options, with several EVs priced at $35,000 or less expected to hit the market in the coming years. Also, rising tariffs would likely restrict the entry of foreign car makers, especially the dominant players from China, increasing the market share of domestic car manufacturers.

Zacks Industry Rank Indicates Dim Near-Term Prospects

The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #188, which places it in the bottom 23% 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 dim 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimates for 2025 and 2026 have moved down 42.9% and 15.6%, respectively, over the past year.

Despite the industry’s weakness, we will present a few stocks that you might consider adding to your watchlist. Before that, let us discuss the industry’s recent stock market performance and valuation picture.

Industry Tops Sector, Lags S&P 500

The Domestic Auto industry has outperformed the auto sector but lagged Zacks S&P 500 composite over the past year. The industry has fallen 4.2% compared with the sector and S&P 500’s declines of 16.4% and 1.9%, respectively.

One-Year Price Performance

Image Source: Zacks Investment Research

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 26.02X compared with the S&P 500’s 14.96X and the sector’s 14.69X. Over the past five years, the industry has traded as high as 55.56X, as low as 10.07X and at a median of 25.18X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

3 Stocks to Consider

Blue Bird: The company is engaged in the designing, engineering, manufacturing and sale of school buses and related parts. It also offers alternative fuel applications with its propane-powered and compressed natural gas-powered school buses. Market demand for BLBD’s buses remains strong, with nearly 4,400 units in order backlog at the end of the first quarter of fiscal 2025. Based on a strong adjusted EBITDA margin in the first quarter of 2025, the company expects a full-year adjusted EBITDA margin of 14%, which will be an all-time full-year record.

BLBD currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 7.92% and 15.61%, respectively. The consensus mark for BLBD’s 2025 EPS has moved north by 12 cents over the past 60 days. It has surpassed earnings estimates in three of the trailing four quarters and missed once, the average earnings surprise being 49.64%.

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

Price & Consensus: BLBD

Image Source: Zacks Investment Research

Tesla: Over the years, the company has evolved into a dynamic technology innovator. It has transformed the EV space the same way Amazon changed the retail landscape and Netflix revolutionized entertainment. TSLA's charging division is poised to enhance its overall profitability. The EV maker is betting on Full Self-Driving (“FSD”) and robotaxis, calling them Tesla’s most valuable future segment. It also plans to roll out unsupervised FSD as a paid service in Austin this June, with potential expansion to California and other U.S. regions by the year-end. The humanoid robot project (Optimus) and the much-awaited Cybercab (a two-seat autonomous vehicle) are expected to hit volume production in 2026 and are likely to drive prospects.

TSLA currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2025 sales and EPS implies year-over-year growth of 7.54% and 9.92%, respectively. The Zacks Consensus Estimate for 2026 sales and EPS implies year-over-year growth of 17.92% and 31.55%, respectively.

Price & Consensus: TSLA

Image Source: Zacks Investment Research

General Motors: This is one of the world’s largest automakers, with a 16.5% market share in the United States in 2024. Its compelling portfolio, with strong demand for its quality pickups and SUVs, bodes well for delivery growth. General Motors’ restructuring efforts in China have begun to yield results. The company reported positive equity income in the country in the last quarter of 2024, excluding $5 billion in restructuring costs. It successfully achieved its $2-billion net fixed cost reduction target in 2024. The company expects to realize $1 billion in annualized savings by discontinuing its robotaxi development and refining its autonomous driving strategy.

GM currently carries a Zacks Rank #3. The Zacks Consensus Estimate for 2025 and 2026 EPS implies year-over-year growth of 8.58% and 2.93%, respectively. The consensus mark for GM’s 2025 EPS has moved north by 26 cents over the past 30 days. It has surpassed earnings estimates in the trailing four quarters, the average earnings surprise being 15.81%.

Price & Consensus: GM

Image Source: Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Tesla, Inc. (TSLA) : Free Stock Analysis Report

General Motors Company (GM) : Free Stock Analysis Report

Blue Bird Corporation (BLBD) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research