Navigating the Used Vehicle Market Storm: Tariffs, Volatility, and Structural Shifts Ahead

The automotive market is in the throes of a perfect storm—tariffs, supply chain disruptions, and shifting consumer preferences are colliding to create both short-term turbulence and long-term structural shifts. For investors, this volatility presents risks but also opportunities in sectors poised to weather the disruption. Let's dissect the data and map the path forward.

The Short-Term Volatility: Tariffs as a Catalyst for Chaos

The 2025 tariffs have ignited a chain reaction in both new and used vehicle markets. Initial panic buying in March and April saw new-vehicle inventories plummet to 2.49 million units by May—a 10.5% year-over-year drop—as consumers rushed to avoid anticipated price hikes. This surge in demand spilled into the used market, driving the Manheim Used Vehicle Value Index (MUVVI) up 4% year-over-year by May. However, the May report revealed a 1.5% month-over-month dip, signaling a cooling phase after April's tariff-fueled spike.

This volatility is exacerbated by inventory shortages. Used vehicle supply tightened to a 44-day supply in May—down from 46 days in 2024—while new vehicle days' supply hit a 50-day low, the lowest since late 2022. Dealers, facing reduced stock, are less inclined to discount: the price pressure index fell to 57, down from 63, as buyers compete for scarce inventory.

For investors, this short-term volatility creates a window to capitalize on sector-specific plays. For instance, EVs have shown remarkable resilience, with prices rising 3.1% year-over-year and outperforming non-EVs in monthly depreciation. Meanwhile, luxury vehicles—up 6.5% annually—are proving their premium pricing power.

The Long-Term Structural Shifts: A New Normal for the Market

Beneath the noise of quarterly fluctuations, deeper trends are emerging. The Cox report warns that tariffs may institutionalize higher used vehicle prices due to persistent supply constraints. Even as trade-in values dipped slightly in May, they remain elevated compared to pre-tariff levels, reflecting a new baseline for depreciation trends.

The segmentation of the market is another critical shift. Luxury and SUV segments, which have outperformed for four consecutive months, suggest a lasting preference for premium and space-efficient vehicles. Conversely, compact cars and trucks—down 1.5% and 0.3% year-over-year, respectively—are losing favor, a trend likely tied to urbanization and EV adoption.

Perhaps the most profound shift lies in consumer behavior. The Conference Board's May confidence index rose 14.4% month-over-month, though it remains below 2024 levels. Yet vehicle purchase intentions hit a 15-month high, indicating that demand is resilient even as prices climb. This signals a structural shift toward used vehicles as an affordable alternative to pricier new cars—a trend Cox predicts will persist despite economic headwinds.

Investment Opportunities: Riding the Waves, Anchored by Data

The interplay of short-term volatility and long-term shifts creates two clear investment avenues:

1. Automotive Retailers with Used Vehicle Expertise:
   Companies like CarMax (KMX) and Lithia Motors (LAD), which dominate the used vehicle retail space, stand to benefit from sustained demand. Their ability to manage inventory, leverage trade-in programs, and adapt to EV adoption positions them well.

1. EV and Luxury Vehicle Players:
   The EV tax credit index at 62 and luxury vehicles' pricing power suggest a bullish case for EV-focused dealers and manufacturers. Even traditional automakers like Ford (F) and General Motors (GM), which have aggressively pivoted to EVs, could see long-term gains as used EV values hold up better than internal combustion engines.

Additionally, valuation firms (e.g., Black Book, Kelley Blue Book) and fintech platforms enabling used vehicle financing could see rising demand as secondary market complexity grows.

The Bottom Line: Position for Resilience, Not Speculation

The used vehicle market is in flux, but data from Cox Automotive reveals a clear path:
- Short-term traders can exploit sector-specific dips (e.g., in non-luxury segments) or EV volatility.
- Long-term investors should prioritize companies with inventory agility and EV integration.

The key metric to watch? Inventory days' supply. A sustained drop below 40 days could signal a buyers' market for dealers, while rising supply might indicate a correction. For now, the structural tailwinds favor used vehicle valuations—a fact investors ignore at their peril.

In this storm, the market isn't just volatile; it's evolving. The winners will be those who bet on the new normals—not the old.