U.S. Car Sales Surge Exposes Hidden Risks in Auto Sector

The U.S. auto market is experiencing a paradox: rising sales numbers mask deepening structural risks, creating a stark contrast with the resilience of the construction sector. While automakers celebrate modest sales growth, investors should look past the headlines to uncover vulnerabilities in supply chains, pricing power, and margin sustainability. Meanwhile, the construction sector—bolstered by federal infrastructure spending—is emerging as a safer haven for capital allocation. Here's why sector rotation into infrastructure plays is becoming imperative.

The Auto Sector's Hollow Triumph

U.S. auto sales in May 2025 hit 1.50 million units, a 3.2% year-over-year increase, fueled by an extra selling day and last-minute demand ahead of tariff hikes. Yet, this growth is misleading.

1. Inventory Crisis:
   New-vehicle inventories at U.S. dealers dropped to 2.49 million units in early May—10.5% below 2024 levels—with days' supply falling to 66 days, the lowest in years. This scarcity is driving average transaction prices to $46,233, up $1,400 from June 2024. While higher prices might seem bullish, they reflect margin erosion for automakers pressured to absorb tariff costs rather than pass them fully to consumers.

2. Tariff-Driven Volatility:
   The reinstatement of Section 232 tariffs on imported vehicles has created a “pay now or pay later” dilemma. Buyers rushed to purchase ahead of the tariffs, inflating March-April sales to 17.8 million SAAR—a peak that has since collapsed. May's 16.0 million SAAR and June's projected 15.0 million signal a demand slowdown, as consumers recoil from sticker shock.

3. Competitive Erosion:
   Tesla's deliveries fell 14% year-over-year in Q2 2025, with its stock down 26% year-to-date, as Chinese rivals like BYD and NIO undercut prices with newer models. Even stalwarts like Stellantis saw 10% lower U.S. sales despite strong performance in trucks and hybrids.

Construction's Steady Hand

While autos lurch from crisis to crisis, the construction sector is quietly outperforming. Public infrastructure projects, fueled by the Infrastructure Investment and Jobs Act (IIJA) and CHIPS Act, are creating $487.6 billion in annual spending—a 0.5% rise in May alone.

1. Policy-Backed Growth:
2. Water Infrastructure: Firms like American Water Works (AWK) and AECOM (ACM) are benefiting from $62 billion allocated to modernizing aging systems.
3. Grid Modernization: Utilities and engineering firms are capitalizing on $36 billion in CHIPS Act funding for semiconductor manufacturing facilities, which require advanced electrical infrastructure.

4. Digital Real Estate: Data center operators like Equinix (EQIX) are expanding aggressively, with hyperscalers like Microsoft and Amazon investing $363 billion in 2025 alone to support AI-driven demand.

5. Resilience in a Volatile Market:
   Infrastructure stocks have outperformed the broader market by 660 basis points over 12 months, with private infrastructure funds delivering 8%-11% returns. Even as housing starts decline, public-sector projects are insulated from mortgage rate spikes and consumer caution.

Investment Strategy: Rotate Out of Autos, Into Infrastructure

The auto sector's challenges—margin pressure, supply chain fragility, and slowing demand—suggest it will remain volatile. Meanwhile, construction's policy tailwinds and defensive characteristics make it a safer bet.

Actionable Ideas:
- Sell or Avoid: Auto manufacturers exposed to tariff-sensitive supply chains (e.g., GM (GM), Toyota (TM)) and EVs with weak profitability (e.g., Rivian (RIVN)).
- Buy or Overweight:
- Infrastructure ETFs: Consider PSCD or GAIN, which track infrastructure stocks.
- Sector-Specific Plays:
- Water & Energy: AWK, WTS Industrial Services (WTSL).
- Tech Infrastructure: EQIX, Crown Castle (CCI).
- Avoid Private Residential Construction: Firms like Lennar (LEN) face headwinds from 7% mortgage rates and labor shortages.

Conclusion

The auto sector's sales surge is a mirage: it obscures unsustainable pricing, margin erosion, and shifting consumer preferences toward hybrids over EVs. Investors should pivot toward construction, where federal spending and inflation-resistant demand offer a clearer path to returns. As the market rotates capital into infrastructure, the gap between auto's headline growth and its underlying fragility will only widen.

Final Take: Sell the auto rally, buy the infrastructure build.