Bank of America’s senior North American automotive equity research analyst John Murphy joins Seana Smith and Madison Mills on Catalysts to examine the auto sector and how the Federal Reserve's interest rate cut could affect car buyers.

The Federal Reserve is expected to cut 100 basis points by the end of the year, with its first 50-basis-point cut on Wednesday, which Murphy says is “about a $20 drop in the monthly payment."

The analyst says a key factor of the rate cuts for the auto sector is a boost in consumer confidence: “Consumer confidence has been dented with rates being high, inflation being high, and then sort of some other noise in the world right now. So I think if rates along with consumer confidence improve, we could see a big unlock of a lot of pent-up demand.”

“There may be some lag of the drop in rates,” Murphy says, explaining that as the rates come down, lenders "likely will pass them pretty directly on to the consumers” for auto loans.

Murphy notes that lower rates will likely only make a small dent in the affordability problem affecting the auto market. He says the average price of a car pre-pandemic in 2019 was $35,000 with an average monthly payment of about $550, compared to a $47,000 average price and $730 monthly payment today.

“What we need to really kind of push affordability and improve it for the consumer over time is a lower mix of vehicles. So, more crossovers and, in some cases, sedans that this more mass-market consumer can actually buy. That really is going to be the key here.”

The analyst outlines how electric vehicle (EV) makers continue to struggle to convert internal combustion engine (ICE) drivers to electric. “If you don't create a better product at a better price, it's really difficult to convince the mass market and regular consumer that they need to make this powertrain switch…there's a lot of hurdles still out there for growing EV penetration.”

Murphy names Ferrari (RACE) and auto dealers like AutoNation (AN) and Asbury Automotive (ABG) as top sector picks.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Naomi Buchanan.