For automotive patrons, 2025 was a yr of alternative and disaster because the prospect of upper costs as a consequence of tariffs drove a file variety of patrons to vendor tons within the first half of the yr. Aided by elevated vendor incentives to assist goose gross sales, unique gear producers like Ford and GM rode the primary half of 2025 to file heights.
This yr, it is the worth of oil, not tariffs, that’s driving financial nervousness, and a protracted worth spike might have dire penalties for the auto business, in accordance with a brand new Morgan Stanley observe.
If costs stay elevated for greater than six months, shoppers might begin delaying car purchases and go for cheaper fashions reasonably than the costlier SUVs which have been driving margins for years.
Sport utility automobiles accounted for 52% of recent car gross sales in 2025, up from 46% in 2021 and 38% in 2016, per Good Automotive Dangerous Automotive. Full-size SUVs have doubled their market share since 2016, representing 3.5% of the market.
The expansion in SUV reputation is nice information for automakers. Revenue margins for SUVs and vehicles common 10% to twenty% larger than these for smaller automobiles, since bigger automobiles are costlier, however use most of the similar parts, in accordance with The Week.
On the similar time, electrical automobiles have change into costlier and fewer worthwhile to provide, so the Large 3 U.S. automakers are all shifting their manufacturing capability away from them in the direction of SUVs.
However Morgan Stanley analysts see larger oil costs scuttling that technique in the event that they persist for a protracted interval.
Gasoline costs are above $6 a gallon in a number of states.
Photograph by FREDERIC J&interval; BROWN on Getty Photographs
Automotive patrons anticipated to shift away from SUVs if gasoline costs stay elevated
The Iran Battle is in the midst of its fourth week, and the Iranian management simply rejected President Donald Trump’s newest ceasefire supply, so at this level, there isn’t any finish in sight for the battle.
Iran has already closed the Strait of Hormuz, by which about 20% of the world’s oil flows, and has now additionally threatened to shut the Strait of Mandeb, which connects the Pink Sea to the Gulf of Aden and accounts for one more 11%.
“Escalating conflict in the Middle East is increasing risk across the global auto supply chain. Tensions around the Strait of Hormuz have heightened energy price volatility and raised concerns about shipping disruptions in oil and aluminum, among other upstream raw materials,” Morgan Stanley analyst Andrew Percoco mentioned in a current observe.
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The agency says it’s persevering with to watch potential OEM and provider stress, in addition to the knock-on results on pricing and demand, amid larger pump costs.
In accordance with Morgan Stanley, each $1-per-gallon enhance in gasoline costs ends in a $450-per-year enhance in gasoline prices for gas-powered automobiles, assuming 27 mpg and 12,000 miles pushed per yr.
Electrical automobiles actually change into a way more cost-effective possibility if gasoline costs rise to $4 per gallon. At that time, EV gasoline prices are 60% decrease yearly than these of their inside combustion engine brethren, so shoppers trying to purchase a brand new automotive might go for an EV reasonably than a fuel-guzzling SUV.
Specializing in lower-margin EVs might be disastrous to the well-laid plans of automakers who’re focusing their vitality on SUVs, so Morgan Stanley took the chance to reassess its calls on the automotive business because it heads in the direction of a gas-price-induced crossroads.
Morgan Stanley picks Normal Motors as its prime auto decide amid larger gasoline costs
If the battle persists, Morgan Stanley expects heightened volatility, and if that occurs, it has picked Normal Motors, ol’ trustworthy, as its prime sector decide, sustaining an obese ranking on the inventory.
GM has “a strong execution track record of managing its business and delivering strong results through supply chain disruptions and volatile operating environments. GM remains one of the top ideas across autos, particularly with the recent sell-off, with the stock now trading at just 5.5x our 2026 EPS and offering 30% upside to our $100 price target,” in accordance with Morgan Stanley.
Associated: Low cost automotive insurance coverage charges supply one other perception into the SUV takeover
GM shares closed Wednesday’s session at $76.61.
In the meantime, Ford, which has dropped 20% over the previous month, fell 1.5% Wednesday, closing at $11.67 per share. Morgan Stanley has an equal weight ranking on the inventory.
“The recent sell-off in the Ford shares also provides a 20% upside to our $14 price target. However, we caution around potential adverse effects to the extent the industry sees an unfavorable mix shift (i.e., away from trucks),” the agency says.
SUV gross sales do have one lifeline ought to larger costs persist
Insurance coverage firms modify your charges based mostly on the kind of car you personal, and so they deem safer automobiles as getting decrease charges.
“Solid, safe and reliable vehicles with low repair costs tend to be cheaper to insure than sports cars, foreign vehicles or cars with a history of costly repairs,” in accordance with analysts at CarInsurance.com who ranked the most affordable automobiles to personal, and located that now SUVs are overtaking sedans in affordability.
In actual fact, sedans now value on common 10% to fifteen% extra to insure than comparable sedans as a consequence of structural design variations and claims knowledge and 16 of the highest 20 least expensive automobiles to insure on CarInsurance.com’s listing had been SUVs.
“Repair and replacement costs are a huge factor for insurance rates,” says Zach Lazzari, founder at Cross Border Protection. “For example, some vehicles have very high repair costs for common fender bender damage. Entire panels may require replacements on one vehicle, while others can be fixed with a simple dent remover and some fresh paint.”
The highest-5 least expensive SUVs averaged underneath $1,172 for a six-month premium, whereas the most affordable sedan (unsurprisingly, a Subaru Legacy) had a median six-month premium of $1,265.
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