DETROIT – For the reason that begin of the pandemic in early 2020, U.S. automakers and sellers have seen document earnings as demand outpaced provides of recent vehicles amid provide chain issues.

However with rates of interest rising, inflation at document highs and recession fears looming, Wall Avenue is intently watching third-quarter earnings outcomes and steering for any indicators client demand is perhaps weakening.

“Auto sentiment may be very poor. We get it. Larger charges, nonetheless excessive costs, low client confidence, a possible recession and European power threat doesn’t make autos a pleasant place,” RBC Capital Markets analyst Joseph Spak wrote in an investor be aware final week.

Spak mentioned third-quarter earnings “ought to principally be advantageous,” with the main focus being on firm commentary and steering revisions. He mentioned 2023 estimates for the sector must “transfer materially decrease.”

RBC and different monetary corporations have signaled the auto trade’s provide chain points might shortly shift to demand issues.

Income for U.S. and European automotive firms are set to drop by half subsequent 12 months as weakening demand results in an oversupply of automobiles, UBS analysts led by Patrick Hummel advised buyers final week.

He mentioned the general automotive sector in 2023 “is deteriorating quick in order that demand destruction appears inevitable at a time when provide is enhancing.”

On Oct. 10, Hummel additionally downgraded Common Motors and Ford Motor, predicting it that it could take three to 6 months for the auto trade to finish up in oversupply. He mentioned that may “put an abrupt finish” to the unprecedented pricing energy and revenue margins for the automakers previously three years.

The funding agency downgraded Ford to “promote” from “impartial” and GM to “impartial” from “purchase” – sending each shares tumbling roughly 8% throughout intraday buying and selling on Oct. 10.

The downgrades got here weeks after Ford mentioned components shortages affected roughly 40,000 to 45,000 automobiles, primarily high-margin vehicles and SUVs that have not been in a position to attain sellers. Ford additionally mentioned on the time that it expects to e-book an additional $1 billion in sudden provider prices through the third quarter.

GM has not signaled such issues for the third quarter, however skilled related points through the second quarter that it was anticipating to make up for through the second half of the 12 months.

GM CEO Mary Barra this previous week advised Yahoo! Finance that the Detroit automaker is getting ready for elevated demand for its automobiles subsequent 12 months, however that it desires to be ready “whatever the setting” to proceed investing in its electrical car plans.

GM is ready to report third-quarter outcomes earlier than markets open Tuesday, adopted by Ford a day later after the bell.

Earlier than Detroit’s largest automakers report earnings subsequent week, electrical car chief Tesla, which has a cult following amongst buyers, is scheduled to report after markets shut Wednesday.

CarMax fueled Wall Avenue’s issues final month after the used automotive seller posted one in every of its greatest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-store unit gross sales fell 8.3%, steeper than the three.6% decline Wall Avenue anticipated.

Used automotive costs stay elevated, however Cox Automotive mentioned wholesale costs for seller auctions have declined for 4 consecutive months. That might sign customers are fed up with the near-record costs.

Citing CarMax’s outcomes, J.P. Morgan analyst Rajat Gupta mentioned the sentiment for franchised sellers’ third-quarter earnings “is probably the most unfavorable we now have encountered because the pandemic.”

“The sector isn’t proof against ongoing macro challenges and we’re dialing again our estimates for 2023 materially to mirror a light recession and hitting a brand new regular by 2025,” Gupta mentioned in an Oct. 6 investor be aware.

A possible vibrant spot for the trade is the low new automotive availability and gross sales. Even when there may be an financial downturn, gross sales might nonetheless improve although earnings could be anticipated to tighten.

Lithia Automotive on Wednesday reported its highest third-quarter income and earnings per share in firm historical past, regardless of lacking Wall Avenue’s high and bottom-line expectations.

Morgan Stanley analyst Adam Jonas mentioned Lithia’s third quarter will be the final of the “actually, actually, actually good” gross revenue per unit quarter of this cycle.

“Whereas [CarMax’s] weak fiscal 2Q outcomes (reported a pair weeks again) set the tone for the used market, we consider [Lithia’s] 3Q miss ought to set the sample for the franchise gamers,” he mentioned in an investor be aware Wednesday.

Different main sellers scheduled to report third-quarter earnings embody Group 1 Automotive on Oct. 26, adopted by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.

Trying to auto suppliers, which have skilled vital price will increase through the coronavirus pandemic, a number of Wall Avenue analysts count on continued progress this 12 months, adopted by single-digit progress, if not much less, subsequent 12 months.

Suppliers are largely paid after they ship components or merchandise to bigger suppliers or automakers. Smaller suppliers that produce supplies or components for lager firms have significantly been beneath stress as a consequence of decrease volumes, elevated prices and labor shortages.

Gary Silberg, KPMG’s international head of automotive, advised CNBC {that a} vital variety of suppliers are going again to the unique gear producers asking for assist.

“Not solely only for them however for his or her suppliers. It is a dance principally that everybody’s doing on a regular basis,” Silberg mentioned. “They do not have plenty of leverage is the issue. It has been a really, very robust 18 months” for smaller automotive suppliers.

A KPMG survey that included greater than 100 automotive trade CEOs whose firms have annual revenues of over $500 million discovered 86% consider there will probably be a recession in subsequent 12 months, and 60% mentioned will probably be gentle and brief.

Responses for the KPMG CEO Outlook survey have been submitted from mid-July to late-August.  

Deutsche Financial institution expects auto suppliers to report third-quarter outcomes in-line with Wall Avenue’s expectations. Analyst Emmanuel Rosner mentioned in a be aware to buyers Wednesday that the agency favors suppliers over automakers into subsequent 12 months, however sees potential earnings draw back threat from smaller suppliers reminiscent of American Axle & Manufacturing and Dana Inc.

– CNBC’s Michael Bloom contributed to this report.