Driving Through Volatility: Why Used Cars and EVs are the Steady Wheels in Tariff Turbulence

The U.S. used car market is proving its mettle in the face of tariff-induced volatility, with the Manheim Used Vehicle Value Index (MUVVI) rising to 208.5 in Q2 2025—a 6.3% year-over-year jump. This resilience, fueled by EV valuations rebounding 12.1% and luxury/SUV dominance, offers investors a compelling thesis: long positions in used car retailers and EV-focused platforms, while cautioning against the ripple effects of new auto tariffs. Let's unpack how inflation signals, rental supply dynamics, and shifting consumer preferences are steering this market—and where the Fed's next rate move fits in.

The Inflation Dashboard: Manheim's Clues for the Fed

The MUVVI's 6.3% Y/Y growth masks a nuanced story. While seasonally adjusted prices climbed, non-adjusted June data showed a 1.1% dip compared to May—reflecting typical summer softness. Yet, the 5.1% year-over-year gain in non-adjusted prices underscores underlying demand strength. For the Fed, this data matters: auto inflation contributes to broader metrics like the PCE Index. With labor costs up 3.2% and repair costs rising 1.1%, the Fed faces a dilemma.

If the central bank perceives the used car market's stability as a sign of contained inflation, rate cuts could follow, easing borrowing costs for consumers and boosting affordability for used vehicles. But inflation expectations are ticking up—consumers now project 3.2% annual inflation, the highest since November 瞠目. This creates a tightrope: overly aggressive rate cuts might stoke broader inflation, but inaction risks stifling demand.

Tariffs, Rentals, and the Shift to Used Cars

New auto tariffs are reshaping the landscape. Fleet sales fell 3.8% Y/Y, shrinking their market share to 17.6%—a boon for used car buyers as rental supply tightens. With new vehicle sales down 4.2% Y/Y (SAAR of 15.3 million), consumers are turning to the secondary market, where inventory remains stable at a 45-day supply.

This dynamic favors used car retailers like Vroom (VRM), which benefit from both the shift from new to used and the growing need for accessible, affordable transportation.

EVs: The Rebound with Legs

Electric vehicles are no longer niche. Their valuations surged 12.1% Y/Y, far outpacing non-EVs (5.6%). This recovery isn't just about demand—it's about supply constraints. With tax credits set to expire, EV manufacturers are racing to qualify buyers, creating urgency. Platforms like Carvana (CVNA) and specialized EV dealers stand to gain as consumers prioritize battery-powered alternatives.

The Caution Flag: Tariffs and Demand Risks

While tariffs push buyers to used cars, they also threaten new vehicle margins and supply chains. A prolonged trade war could strain automakers' profitability, indirectly hurting used car liquidity if new models become too scarce. Investors must monitor tariff policies closely—especially any escalation impacting semiconductor or battery imports.

Investment Playbook: Ride the Used Market, Bet on EVs

1. Long Used Car Retailers: Companies like Vroom (VRM) and CarMax (KMX) benefit from rising demand and stable inventory.
2. EV Platforms: EV-focused retailers (e.g., eVgo, or EV ETFs like ARCA) capitalize on surging EV valuations and tax credit tailwinds.
3. Avoid New Auto Exposure: Tariff risks and falling new sales make pure-play automakers speculative bets.

Bottom Line

The used car market's resilience, EV's comeback, and Fed-friendly inflation signals paint a bullish picture. Investors should prioritize exposure to secondary market players and EV specialists while hedging against tariff-related disruptions. As long as consumers keep trading up from new cars to used ones—and EVs keep outperforming—the road ahead remains clear for these sectors.

Drive carefully, but drive.