Jeeps could crash the party at GM and Ford

Six months ago, GM and Ford were penciling price declines into their forecasts for the year as the American vehicle market started to normalize following supply shortages. But sales prices have turned out better than expected, enabling the manufacturers to lift their profit guidance for the year despite a stalling recovery in sales.

Detroit also is a beneficiary of the EV slowdown that has hit Tesla. The prospect of consumers gradually shifting to a new powertrain technology—that the industry incumbents haven’t yet worked out how to make profitably—has been a significant investor concern. It still is, but the pain appears to be delayed, with EV sales stuck at around 7% of the U.S. total in the first half, down slightly from the second half of last year.

GM and Ford shares are up 34% and 15% so far this year, respectively. Profit-forecast upgrades account for most of the gains, with generous buybacks mechanically increasing earnings per share more for GM. Rising earnings multiples explain the rest, though they remain below their historic averages. Last fall, GM’s stock was trading at the lowest multiple in its postbankruptcy history, so there was ground to catch up.

The biggest risk for the second half is that pricing discipline starts to slip—led by Stellantis, which this year has gone from being the star of the Detroit family to the black sheep.

After a knockout few years, the successor company to Fiat Chrysler has struggled to shift an aging, aggressively priced line up of Jeeps and RAM trucks. With inventories accumulating on lots, dealers have been pushing it to sweeten the deal with buyers. This month the company kicked off a $2,000 summer “bonus cash" program.

Cutting prices that were too high won’t necessarily start a price war, and Stellantis’s problems seem largely of its own making. “We were arrogant," as Chief Executive Carlos Tavares admitted at an investor day last month.

Yet it wouldn’t take much more competition for buyers to make life tough for Stellantis’s peers. Car manufacturers’ results are very sensitive to small changes in vehicle prices given their high fixed costs. So far, the new-vehicle market has weathered high interest rates better than many expected, helped by demand pent up during the pandemic era, but this can’t last indefinitely.

Inventories have been gradually building back to pre-Covid levels: There were about 2.9 million vehicles on dealer lots as of July 8, shy of the 3.4 million level at the start of 2020 but up from less than a million at the 2021 lows, according to Cox Automotive data.

What higher incentives from Stellantis will certainly do is hit its own results. Analysts have cut their forecasts for the company’s earnings per share over the next 12 months by about 8% this year, including a roughly 3% decline this month.

Worries about unprofitable EVs might seem less urgent right now given the rising prospect of another Trump presidency. While the former president has lately softened his previous opposition to the technology, with warm words for Elon Musk following the Tesla CEO’s conversion to his cause, he still criticizes the government support EVs have enjoyed under President Biden. A Republican White House could keep the good times rolling a bit longer in Detroit.

Still, the long-term uncertainties around how much manufacturers should invest in which powertrain aren’t going away. Bank of America’s recent “Car Wars" report, an annual review of U.S. product pipelines, put GM at the bottom of its ranking because the company’s recent focus on developing EVs could soon leave it with an aging lineup of conventional vehicles.

GM and Ford have been tough on buy-and-hold investors for decades, but their constant ups and downs give traders opportunities. The outlook unexpectedly brightened in the first half. Don’t be surprised if the mood changes again.

Write to Stephen Wilmot at stephen.wilmot@wsj.com