Post-EV Credit US Auto Market Dynamics: Capital Reallocation and Sector Resilience

The expiration of the U.S. federal electric vehicle (EV) tax credit at the end of September 2025 has triggered a seismic shift in the automotive sector, reshaping capital allocation and testing the resilience of both traditional internal combustion engine (ICE) and EV segments. As automakers recalibrate strategies in a post-subsidy environment, the interplay between profitability, market share retention, and technological adaptation is defining the industry's trajectory.

Capital Reallocation: From Hype to Pragmatism

The end of the $7,500 tax credit, introduced under the Inflation Reduction Act (IRA) in 2022, has forced automakers to pivot from speculative bets on EVs to more pragmatic capital deployment. According to a report by J.D. Power, while retail sales of battery-electric vehicles (BEVs) stabilized in 2025, the types of models available are evolving, with mass-market EVs from Chevrolet, Ford, and Hyundai now accounting for one-third of the EV market, according to a Newsweek analysis. However, the expiration of incentives has led to immediate fallout: automakers like General Motors and Hyundai have canceled or suspended high-risk EV projects, while Rivian and Lucid report significant losses in Q2 2025, as detailed in a New York Times report.

Capital is increasingly flowing toward cost efficiency and hybrid technologies. Goldman Sachs Research notes that automakers are shifting toward a balanced mix of ICE and hybrid vehicles, which could boost profit margins by 2–3 percentage points. Meanwhile, software-defined vehicles (SDVs), which integrate advanced software for autonomous driving and energy optimization, are attracting investment. The global SDV market, valued at $207.76 billion in 2025, is projected to grow at a 31.6% CAGR through 2033, according to Grand View Research.

Sector Resilience: ICE's Reprieve and EVs' Long Game

The ICE segment has seen a temporary reprieve as policy shifts and affordability challenges slow EV adoption. Morningstar forecasts U.S. light-vehicle sales to remain below 16.5 million units annually until 2028, with ICE vehicles retaining dominance due to their profitability and established supply chains. For example, GM's mixed portfolio of ICE and EVs allowed it to report an 8% sales increase in Q3 2025, while all-EV brands like Rivian struggled with production cuts, per a CNBC report.

EVs, however, are not retreating entirely. Despite a predicted 24% drop in plug-in vehicle sales post-September 2025, automakers are focusing on organic demand through affordability strategies. Mainstream EVs now cost an average of $44,000-cheaper than their gas-powered equivalents-thanks to federal tax credits, according to Newsweek. New models like the Tesla Model Y and Rivian R2 aim to expand into mainstream SUV segments, while leasing programs and used EV markets are being prioritized to sustain adoption, as reported by InsideEVs.

Hybrid and plug-in hybrid technologies are emerging as transitional solutions. With a 19% year-on-year growth in 2024, hybrids are expected to capture 23% of the market in 2025, driven by consumer demand for lower emissions and improved fuel economy, according to Forbes. Automakers like Toyota and Stellantis are expanding hybrid offerings, leveraging their expertise in ICE technology to bridge the gap between traditional and fully electric vehicles.

Adaptation Strategies: Software and Supply Chains

The race to adapt is intensifying. Chinese automakers, with their 15-year head start in EV infrastructure and cost-effective production, are challenging U.S. incumbents, according to PwC. In response, U.S. automakers are streamlining operations, regionalizing supply chains, and accelerating SDV adoption. The on-board (edge computing) segment of SDVs, critical for low-latency processing in autonomous driving, dominated 64.3% of the market in 2024, per Coherent Market Insights.

Infrastructure investments are also gaining urgency. A Forbes article highlights BloombergNEF's view that expanded charging networks and battery cost declines will be pivotal for long-term EV adoption. Meanwhile, state-level policies-such as California's focus on low GHG energy sources-are proving more influential than federal incentives in driving EV adoption, according to a ScienceDirect study.

Investment Implications

For investors, the post-EV credit landscape presents a nuanced picture. ICE automakers with diversified portfolios, such as GM and Ford, are better positioned to weather short-term volatility. Hybrids and SDVs represent high-growth opportunities, particularly as automakers balance profitability with decarbonization goals. However, EV-only firms face existential risks unless they achieve price parity with ICE vehicles or secure regulatory credit sales.

The U.S. auto market is entering a phase of recalibration, where resilience will be determined not by subsidies but by operational efficiency, technological agility, and alignment with consumer demand. As the industry navigates this transition, capital will flow to those who can harmonize tradition with innovation.