Tesla Led the Way Down in a Terrible Quarter for Car Stocks

Text size

Good riddance to the second quarter. It was an epically bad quarter for U.S. stocks, and it was worse for the automotive sector. Investors have to look ahead to the second half of 2022 to hope the year can be saved.

The

S&P 500
dropped 16.5% in the second quarter. The

Dow Jones Industrial Average
dropped 11.8%. Both were the worst quarterly drops since the first quarter of 2020, according to Dow Jones Market Data. The

Nasdaq Composite
had its worst quarter since the fourth quarter of 2008, dropping 17.5%.

Car stocks suffered even more during the period.

Ford Motor

(ticker: F) and

General Motors

(GM) shares dropped 34% and 27%, respectively.

Tesla

(TSLA) shares did worse, falling about 38%.

The drop in

Tesla

wiped out more than $400 billion of the electric-vehicle pioneer’s market capitalization—about 1.6 times the current market cap of

Toyota Motor

(TM).

Large auto parts companies didn’t fare any better; none saw their shares rise in the second quarter.

QuantumScape

(QS) shares posted the steepest drop, falling 57%. The average drop for stocks in the group was about 21%.

QuantumScape

is a start-up working on new EV battery technology. It doesn’t generate free cash flow. Investors lost their enthusiasm for more speculative ideas in the past few months amid rising interest rates and persistently high inflation.

Rising rates are a problem for car stocks in a couple of ways. For starters, higher rates tend to depress stock valuations. And most cars are bought with financing. That means higher interest rates make it harder to afford vehicle purchases, hurting new car demand. The yield on the 10-year Treasury note started the second quarter at 2.34%, but ended the period at 3.01%.

---

Newsletter Sign-up

The Barron’s Daily

A morning briefing on what you need to know in the day ahead, including exclusive commentary from Barron’s and MarketWatch writers.

---

Inflation hurts too: It threatens profit margins via higher costs for car and auto parts manufacturers. The pace of inflation averaged 8.5% year over year in the second quarter, up from 7.5% in the first quarter.

EV stocks were hit a little harder than traditional car stocks and auto parts suppliers. The average return for electric-vehicle stocks that Barron’s tracks was a loss of about 38% during the quarter.

Three EV stocks did rise, however. Shares of Chinese auto makers

NIO

(

NIO

),

Li Auto

(LI) and

XPeng

(XPEV) rose 3%, 48%, and 15%, respectively.

They rose partly because all three had dreadful first quarters. NIO stock dropped 34% in the first quarter. Li and

XPeng

shares fell 20% and 45%, respectively.

That’s what investors can cross their fingers for—that things bounce back for other auto stocks and the second quarter is as bad as it gets this year.

The first data points investors get in the second half of the year will be June delivery figures from NIO, Li, and

XPeng
.
Those should arrive July 1. Covid-19 lockdowns in China are easing, and investors expect a bounce back demand and production. The three delivered about 18,000 vehicles, combined, in April, and almost 29,000 vehicles in May. A result around 35,000 should be good enough for investors and offer a sign of hope for the sector.

Tesla will be next, with second-quarter deliveries being reported some time around July 2. Wedbush analyst Dan Ives believes 250,000 units is the “whisper number” that investors are paying attention. A whisper number is what investors expect, regardless of what the published consensus number actually is.

Solid numbers from the three Chinese EV makers and the world’s largest auto maker by market value, Tesla, would help wash the taste of the second quarter out of their mouths.

Write to Al Root at [email protected]