Al Root

Car stock investors appear to be sleeping on the magnitude of the tariff problem for auto makers. A wake-up call is coming soon.

Auto stocks are holding up relatively well Thursday in the aftermath of President Donald Trump's Wednesday tariff bombshell, but that doesn't mean this is the bottom.

Stocks were getting broadly hammered early Thursday. Apple shares dived 9%, while the S&P 500 and Nasdaq Composite slid 4% and 4.9%, respectively. The Dow Jones Industrial Average was off more than 1,500 points. The Roundhill Magnificent Seven exchange-traded fund tumbled 5.7%.

Ford Motor and General Motors shares were down 2.9% and 3%, respectively. All things considered, that's not too bad.

The reason for the somewhat muted reaction is that while Trump shocked the tech world, nothing really changed for cars. The import tariff on cars and car parts is still 25%, as expected.

But 25% levies are still a disaster for the industry. By most accounts, including Barron's, the tariffs will raise costs by an average of roughly $5,000 per vehicle. Ford and GM make less than $4,000 per vehicle. In a recent report, UBS analyst Joseph Spak warned that 25% tariffs could wipe out all of Ford and GM's 2025 earnings.

Spak's modeling was only theoretical: It's almost impossible to know precisely how things will play out. Car makers will work to reduce costs, the sales mix will change, and parts suppliers will bear some of the burden. Interest rates and currency values will change. However things adjust, the magnitude of the automotive tariffs earthquake is 9.5 out of 10.

Through midday trading, Ford and GM stocks were down 7% and 14% since the Nov. 5 election. Investors might assume earnings will be down between 5% and 15%. That's probably too optimistic.

There will be some updates regarding tariff impacts on earnings when Ford and GM report first-quarter earnings in a few weeks. Both gave 2025 guidance that excluded the impact of tariffs. Now tariffs are here.

Wall Street is just waiting. Analysts project Ford's 2025 operating income at $$7.6 billion, in line with the previous guidance. Analysts project GM's 2025 operating profit to be $13.9 billion, which is in line with its previous guidance.

Deutsche Bank analyst Edison Yu wrote Thursday that the estimated impact of tariffs on annual profits is almost $10 billion for Ford and $14 billion for GM. Both those numbers are higher than current estimates.

If guidance cuts are severe, as Yu and Spak's math suggests, the stocks have more downside.

Stellantis stock isn't having as good of a day. Shares were down 5.2% in early trading. The drop came with tariffs, and after the company decided to idle some plant capacity in Canada and Mexico due to the levies.

"With the new automotive sector tariffs now in effect, it will take our collective resilience and discipline to push through this challenging time," reads part of an email sent to North American employees. "These are actions that we do not take lightly, but they are necessary given the current market dynamics."

Stellantis also suffers from high dealer inventories, so losing production is less painful. Still, reducing production and laying off workers are the kinds of things investors should prepare for -- along with lower earnings estimates.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 03, 2025 11:52 ET (15:52 GMT)

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