Tariffs Loom, But US Auto Dealers Hold Firm: Watch Lithia & Driveway And AutoNation

U.S. franchise auto dealerships are demonstrating resilient near-term fundamentals, with third-quarter new-vehicle demand growing mid-to-high single digits and EV mix approaching 10% due to steady affordability and pulled-forward demand. JPMorgan has raised its Q3 estimates for the sector, favoring Lithia & Driveway and AutoNation, but forecasts increasing demand and Gross Profit Per Unit (GPU) risk into 2025-2026. This outlook is driven by expiring EV credits, rising tariffs, and a softening labor market, projecting a decline in 2026 industry sales to 15.5 million SAAR from 16.0 million in 2025.

Analysis

U.S. franchise auto dealerships are demonstrating resilient near-term fundamentals, with third-quarter new-vehicle demand tracking mid-to-high single-digit growth, contrary to earlier fears. This strength is supported by disciplined OEM pricing that has maintained consumer affordability, coupled with a temporary boost in electric vehicle sales, which now constitute approximately 10% of the mix quarter-to-date versus 7% previously, driven by the pull-forward of demand ahead of expiring credits. Consequently, JPMorgan has raised its Q3 estimates for the sector by about 2%, which is roughly 7% above consensus, citing stable inventories and a gradual normalization in gross profit per unit (GPU). However, a more cautious outlook is warranted for late 2025 and 2026, as building headwinds from expiring EV incentives, the pass-through of tariffs to sticker prices, and a softening labor market are expected to cause a pullback in demand. JPMorgan projects U.S. SAAR will decline to approximately 15.5 million in 2026 from 16.0 million in 2025. Within this context, Lithia & Driveway (LAD) is highlighted as the top pick, followed by AutoNation (AN), suggesting perceived outperformance even as the macro environment becomes more challenging.

Key Decisions for Investors

• Investors may consider a near-term tactical long position in the auto dealership sector to capitalize on 'better than feared' Q3 performance, but should plan to re-evaluate exposure ahead of late 2025 due to projected demand headwinds.
• For sector-specific exposure, a relative value strategy favoring Lithia & Driveway (LAD) and, to a lesser extent, AutoNation (AN) could be prudent, in line with JPMorgan's view of their superior positioning.
• Monitor key forward-looking indicators such as wholesale-to-retail price spreads, monthly U.S. SAAR figures post-September, and labor market data, as these will be early signals of the demand pullback forecasted for 2026.
• Recognize that the current 10% EV sales mix is likely inflated by expiring credits; a subsequent decline could create a mix and profitability headwind in upcoming quarters.