JPMorgan has moved Li Auto to an underweight position, warning that a combination of softening demand, elevated input costs and unclear policy direction could weigh on Chinese automakers through 2026. Shares of Li Auto fell 3.4% in premarket trading on Monday following the brokerage's note.
The bank expects China’s auto sector to follow a pattern similar to earlier down cycles - driven by weaker passenger vehicle demand and punctuated by sharp intra-year swings tied to new model rollouts, seasonal demand shifts and earnings surprises. JPMorgan said the overall industry dynamic will likely resemble phases seen in 2018 and 2025, where the sector underperformed amid these forces.
In a revision to its outlook, JPMorgan now forecasts domestic passenger vehicle volumes to decline 4% in 2026, a steeper drop than the 2% contraction it had previously assumed. The bank noted that demand softness observed in late 2025 is expected to persist into next year. It added that robust export activity may partially blunt the domestic slump, with wholesale volumes forecast to be roughly flat on a combined basis.
JPMorgan also expects growth in new energy vehicles to decelerate to single-digit rates next year. The weaker demand outlook, coupled with higher raw-material costs, led the bank to reduce earnings estimates across a group of major manufacturers - specifically naming BYD, Great Wall, Nio, Xpeng, Leapmotor and Li Auto among those with downgraded profit forecasts.
The bank highlighted recent increases in key input prices - reporting that lithium, copper and storage chip prices have risen in the range of more than 30% to 50% recently - and said it anticipates cost pressure will filter through supply chains by the second quarter of the year. Based on these assumptions, JPMorgan now sees Li Auto moving into a loss in 2026.
Against this tougher backdrop, JPMorgan identified Geely and Sinotruk as its preferred picks in the sector. The firm raised estimates for Sinotruk and left Geely forecasts unchanged, noting that both companies' earnings trajectories sit above broader market expectations.
The bank expects exports to assume an increasingly important role for China’s auto manufacturers in 2026, potentially contributing between 20% and 50% of earnings for major firms. To counteract the effects of tariffs and trade policy, automakers are expanding overseas distribution networks and accelerating local production in key markets.
JPMorgan added that selective buying opportunities in the sector could materialize from March into the second quarter. The bank cited a potential seasonal pickup in demand, expected clarity on subsidy policy following China’s March policy meetings, the conclusion of supplier negotiations and heightened industry activity around the Beijing Auto Show in late April as possible catalysts for improved sentiment.
Contextual note - The brokerage’s action and the related forecasts reflect its internal models and assumptions about demand, costs and policy developments; the firm’s view implies notable downside risk for manufacturers exposed to domestic passenger vehicle sales and input-cost inflation.