Hybrids are outselling everything in Europe. That’s bad news for 2035

U.S. EV demand is weakening after the $7,500 federal tax credit expired, with 42.6% of second-quarter EV trade-ins switching to combustion vehicles. Hybrids have become the EU's largest-selling powertrain at 37.3%, while the European Commission has proposed allowing hybrids to remain legal after 2035. The data signal a consumer shift away from pure EVs, creating near-term pressure for EV-focused automakers and supporting hybrid-oriented manufacturers.

Analysis

The relevant earnings sensitivity is not simply EV volume: it is mix-driven margin and capital-efficiency dispersion. TM and HMC have already amortized hybrid platforms across high-volume nameplates, so incremental hybrid demand should support utilization and pricing with limited new capex; GM and F can benefit in trucks/SUV hybrids but remain exposed to EV-program restructuring charges and lower factory absorption. TSLA and RIVN face the more acute risk because a weaker policy-supported demand pool raises customer-acquisition costs, residual-value risk and the probability of price cuts, compressing gross margin before it necessarily shows up as a large unit-volume miss.

Over the next 1-3 months, the catalyst is OEM quarterly guidance on hybrid mix, EV incentive spending and battery procurement commitments. A broad EV selloff may be excessive for TM, whose hybrid leadership is a relative earnings tailwind, but underestimates risk for pure-play battery materials: lower North American EV penetration delays the demand curve against capacity additions, worsening pricing and utilization for ALB and other upstream suppliers. Over 6-18 months, any regulatory accommodation for hybrids increases the terminal-value risk of dedicated EV plants and could force further impairments or capex deferrals at legacy OEMs; this is supportive of suppliers with flexible powertrain content rather than EV-only exposure.

The contrarian case is that the demand signal is cyclical and financing-driven rather than a permanent technology reversal. If auto loan rates decline materially or OEMs restore effective lease subsidies, EV monthly-payment parity can return quickly; that would disproportionately re-rate TSLA and beaten-down battery names. The thesis is falsified if EV incentives and lease support stabilize transaction prices without renewed margin erosion, or if TM/HMC hybrid inventory rises while incentives increase—evidence that apparent hybrid strength is supply-led rather than demand-led.

Key Decisions for Investors

• Initiate a 3-6 month pair trade: long TM / short TSLA, sized beta-neutral. TM offers hybrid-mix margin resilience while TSLA remains exposed to price-led demand clearing; target a 10-15% relative move, with a stop if TSLA automotive gross margin excluding credits stabilizes above prior-quarter levels while TM cuts hybrid guidance.
• Prefer long HMC over F for North American powertrain transition exposure over 6-12 months. HMC's hybrid portfolio has lower execution and restructuring risk; reassess if HMC reports rising dealer days' supply or requires materially higher incentives on hybrid models.
• Maintain an underweight or put-spread hedge in ALB for the next two earnings cycles rather than a directional short at depressed prices. The key downside catalyst is reduced battery procurement/capex guidance from GM, F or European OEMs; cover if lithium spot prices recover sustainably and contract pricing stops resetting lower.
• Use any policy-driven EV rally to reduce exposure to RIVN and other subscale EV manufacturers until there is evidence of positive gross-margin progression independent of credits or temporary promotional financing. The risk/reward turns constructive only after verified bill-of-material cost reductions and adequate liquidity through the next major product launch.