The Zacks Domestic Auto industry outlook appears muted. While vehicle sales have remained relatively resilient, industry volumes are expected to decline in 2026 as affordability challenges, high financing costs and economic uncertainty continue to weigh on demand. The EV market is also facing a slower-than-expected transition following the expiration of purchase incentives, creating another growth headwind for automakers. Meanwhile, rising fuel prices tied to geopolitical tensions could further pressure consumer spending. Although higher tax refunds and new auto-loan interest deductions may provide some support, these benefits are unlikely to fully offset broader industry challenges, pointing to a period of modest growth at best.

Despite industry challenges, established players like General Motors (GM Quick QuoteGM - Free Report) and Ford (F Quick QuoteF - Free Report) are leveraging their scale, diverse product portfolios, and disciplined capital allocation to navigate a slower-growth environment.

Industry Overview

The Zacks Domestic Auto industry includes companies involved in the design, manufacturing and sale of vehicles worldwide. These range from passenger cars and crossover vehicles to sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry is highly cyclical and closely tied to consumer spending, while also supporting a large employment base. At the same time, it is undergoing a major transformation as automakers invest heavily in new technologies. The role of software, electrification and digital connectivity is reshaping how vehicles are developed and sold. Many companies also operate engine and transmission plants and invest in research, development and testing of electric and autonomous vehicles.

Key Investing Themes

Auto Demand Holds Up Despite Pressure: The U.S. auto market continues to show resilience despite affordability concerns, elevated interest rates and geopolitical uncertainty. Per S&P Global Mobility, industry sales are expected to have reached about 1.44 million units in May, translating to a 15.8 million SAAR, slightly below recent months but still ahead of year-ago levels. However, growth remains limited as consumers face higher vehicle prices and financing costs. Looking ahead, S&P Global Mobility expects U.S. vehicle sales to decline more than 3% in 2026, suggesting that demand is stable rather than robust. Automakers may continue to face a challenging operating environment with only modest volume growth opportunities.

EV Adoption Faces Near-Term Hurdles: Battery electric vehicle (BEV) demand remains under pressure following the expiration of purchase incentives. While rising fuel prices have renewed interest in fuel-efficient vehicles, EV sales are yet to show a meaningful rebound and remain below year-ago levels. Consumers continue to weigh affordability concerns, charging infrastructure availability, and uncertain economic conditions before making EV purchases. The launch of several new electric models throughout 2026 could help stimulate demand, but the pace of adoption will likely depend on how long elevated fuel prices persist and whether automakers can offer compelling products at competitive price points.

Fuel Prices Threaten Consumer Spending: The ongoing U.S.-Iran conflict has kept energy markets on edge, leading to higher fuel and energy costs for consumers. Rising fuel prices are adding pressure to household budgets at a time when economic growth is already slowing. Consumer confidence weakened in May, while first-quarter GDP growth was revised lower due to softer spending trends. If elevated energy costs persist, inflation could remain high, limiting consumers' ability to make large discretionary purchases such as vehicles. This creates a key headwind for automakers, as weakening consumer sentiment and affordability concerns could weigh on vehicle demand in the coming quarters.

Tax Benefits Could Aid Vehicle Sales: Tax-related benefits may provide a modest boost to U.S. vehicle demand. Higher tax refunds, supported by provisions in the One Big Beautiful Bill Act, could leave consumers with additional disposable income for major purchases. The legislation also allows taxpayers to deduct up to $10,000 annually in interest paid on qualified auto loans, potentially reducing the overall cost of vehicle ownership. While these incentives are unlikely to drive a major surge in sales, they could help offset affordability pressures from higher vehicle prices, interest rates and tariffs, providing some support for auto demand.

Zacks Industry Rank Indicates Tepid Prospects

The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #202, which places it in the bottom 18% of more than 240 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak 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 getting pessimistic about this group’s earnings growth potential. Over the past year, the industry's earnings estimate for 2026 has declined 28%.

Despite that, we will present a couple of 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 & S&P 500

The Domestic Auto industry has outperformed the auto sector and the Zacks S&P 500 composite over the past year. The industry has returned 39% compared with the sector and the S&P 500’s growth of 22% and 31%, 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 48.6X compared with the S&P 500’s 18.94X and the sector’s 27.85X. Over the past five years, the industry has traded as high as 69.8X, as low as 10.28X and at a median of 29.31X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

2 Stocks to Focus On

General Motors: The company continues to demonstrate its strength as the largest automaker in the United States, delivering more than 626,000 vehicles in the first quarter of 2026. Demand remains healthy across Chevrolet, Buick, GMC and Cadillac, supported by its popular truck and SUV lineup. The company is targeting an 8%-10% adjusted EBIT margin in North America this year, highlighting its focus on profitability.

Beyond vehicle sales, GM's expanding software and services business is becoming a key earnings driver, generating recurring high-margin revenues. Improving performance in China, a strong balance sheet, and ongoing share repurchases and dividends further strengthen General Motors’ investment appeal.

GM stock currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for General Motors’ 2026 and 2027 EPS implies year-over-year growth of 21% and 10.5%, respectively. The consensus mark for 2026 and 2027 EPS has moved up by 12 cents and 10 cents, respectively, in the past 30 days.

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

Price & Consensus: GM

Ford: The company remains well-positioned thanks to its broad vehicle portfolio, led by the F-Series, Maverick pickup, and a strong SUV lineup. Its balanced approach to electrification, including a growing focus on hybrids, provides flexibility as EV demand evolves. Ford Pro continues to be a major growth driver, benefiting from strong commercial vehicle demand and expanding software and services offerings.

Paid software subscriptions increased 30% year over year to 879,000 in the first quarter of 2026, supporting higher recurring revenue. Meanwhile, Ford Energy offers a new long-term growth avenue, while the company's strong liquidity and dividend yield above 4% enhance its appeal to investors.

F stock currently carries a Zacks Rank #3. The Zacks Consensus Estimate for Ford’s 2026 and 2027 EPS implies year-over-year growth of 48% and 13.4%, respectively. The consensus mark for 2026 and 2027 EPS has moved up by a cent and 2 cents, respectively, in the past seven days.

Price & Consensus: F