These three EV makers, not Tesla, are about to eat everyone else’s lunch, says Morgan Stanley

That said, Wednesday’s bullish session driven by inflation-data relief has chased away some valuation worries, says Louis Navellier, chairman and founder of Navellier & Associates. He says the S&P is now trading at 24.8 times earnings on a trailing basis and 21.2 times forward earnings. 

“These are bull market levels, beyond a soft landing scenario, though clearly skewed by the weight of the very high multiple megatechs. The risk at this point is that even if the earnings season is strong, how much more of a rally is possible,” he ponders to clients. We may soon find out as earnings season is about to get under way.

Switching gears, literally, is our call of the day from Morgan Stanley, whose strategists say investors and Tesla
TSLA,
+2.17%
enthusiasts ignore the power of China’s might in the auto sector — internationally and domestically — at their peril, as they flag three investible names.

According to equity strategists led by Edward Stanley, global automotive is one of the few sectors that is at the heart of their three big themes this year — tech diffusion, multipolar world and decarbonization.

On that first point, they see global auto brands losing around 8 to 10 percentage points of market share due to challenges from cheaper electric vehicle (EV) exports and a falling internal combustion mix, with margins at risk from the companies involved.

“The vehicle margins of global brands stood at 20-24% in 2022, compared with 15-19% for Chinese brands, perhaps making the market complacent about the potential gross profit margin convergence between the two over the next decade,” said the analysts.

As for the multipolar world theme, they see China already scooping up market share in Europe. “While Tesla has successfully established EV hegemony, the undersupply of affordable EVs remains a global challenge. Consequently, China-made EVs are infiltrating developed markets, rivaling global peers with superior affordability, variety and quality,” said Stanley and the team.

Volkswagen
VOW3,
-1.18%,
for example, has around an 18% share of China’s internal combustion engine market — that is the less climate friendly car that pukes out carbon monoxide, etc. — but just a 2% slice of China’s battery-electric-vehicle market, they say.

“Fueled by increasing multipolarity, this balance is set to worsen for the incumbents. By 2030 we expect Chinese brands to have a 30% EV share outside China. The investment implications and protectionism they ultimately face will vary by region, but this is not deterring Chinese investment,” said the bank’s strategists.

Finally on that decarbonization theme, Morgan Stanley’s base case implies 40% global EV penetration by 2030 and 30% offshore market share for China-made EVs. Around $280 to $360 billion of capital expenditure would be needed during this period, they say.

If all of the above plays out as the bank thinks it will, they see EV makers BYD
002594,
-1.28%,
Nio
NIO,
-3.58%
and Xpeng
XPEV,
-7.33%
as the biggest beneficiaries. The latter two, as many are aware, have U.S. listings.

Longer term, Renault
RNO,
-0.13%,
Honda
7267,
+0.21%,
VW, Ford
F,
-0.20%
and Stellantis
STLA,
+2.33%

STLAM,
-0.58%,
as legacy original equipment manufacturers (OEMs), “would be more challenged,” said the strategists.

For western OEMs to avoid this, Morgan Stanley’s “slow EV case” scenario would need to play out, meaning, 25% global EV penetration by 2030 and 15% offshore market for China made EVs. “This appears to be an increasingly unlikely outcome, however,” they add.

Read: EV sales stall as, aside from Tesla and BYD, there’s a ‘step back from euphoria’

The markets

Stocks
DJIA,
+0.14%

SPX,
+0.85%
are up, led by tech
COMP,
+1.58%
NQ00,
,
with Treasury yields
TMUBMUSD10Y,
3.798%

TMUBMUSD02Y,
4.678%
dropping and the dollar
DXY,
-0.09%
weakening further. Oil
CL.1,
-0.27%
gains have pared. The International Energy Agency said it expects strong demand for oil growth in 2024, but less so from U.S. and European markets. In Asia, the Nikkei
NIK,
-0.09%
and Hang Seng
HSI,
+0.33%
gained 1.4% and 2.6% after Wall Street’s bullish session on Wednesday.

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The buzz

Weekly jobless claims fell 12,000 in the latest week, while elsewhere, data showed wholesale inflation slowed to a crawl. Still to come is the federal budget at 2 p.m. San Francisco Fed President Mary Daly will make a TV appearance at 11:10 a.m. and Fed Gov. Christopher Waller speaks at 6:45 p.m.

The Securities and Exchange Commission is suing Celsius founder Alex Mashinsky for ‘fraudulent’ crypto sales.

Amazon
AMZN,
+2.68%
says the first day of Prime Day shopping drove its best sales performance to date.

Shares of Perrigo
PRGO,
+0.48%
are climbing after the over-the-counter pharmaceutical maker said the U.S. Food and Drug Administration approved its daily oral contraceptive pill.

Exxon Mobil
XOM,
-1.83%
announced a deal to buy Texas-based carbon-capture group Denbury for a small premium.

The first batch of earnings is up, with PepsiCo
PEP,
+2.38%
and Delta
DAL,
-0.50%
stocks each climbing after forecast-beating results and guidance boosts from the drinks maker and airline. Banks including JPMorgan
JPM,
+0.49%
will report results on Friday.

Chinese internet stocks such as Bilibili
BILI,
+5.03%
and Alibaba
BABA,
+2.78%
tracked Asian gains as analysts see more signs of a Beijing industry crackdown fading after Chinese Premier Li Qiang met with senior executives from tech firms. Earlier, data showed China’s exports fell more than market expected in June, a sign of rapidly weakening global demand.

A new McKinsey report says $800 billion in global office space value will be at risk by 2030 from postpandemic hybrid working.

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The chart

Among the big reactions to Wednesday’s cooler-than-forecast inflation report, the dollar got smacked, hitting a 15-month low against a basket of rivals
DXY,
-0.09%
on Wednesday. This tweet from Tressis chief economist Daniel Lacalle shows the buck on new ground:

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Random reads

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