Could cracks in U.S. auto loans expose an overvalued bull market?
As headlines mount, I wonder whether the nascent disorder in U.S. subprime auto loans becomes a bigger fissure into which a stretched stock market could fall. With stock valuations hovering at historically stretched levels, even a hint of a macroeconomic or financial fracture could precipitate a correction.
I don’t know if the issues are systemic, but it remains the case that equities are expensive. We have had three very good years, and rebalancing portfolios is always prudent, especially when alternative funds offer diversification benefits without sacrificing returns.
Are bankruptcies, record delinquencies, and regulatory warnings enough to really shake things up?
Here are the headlines:
- Subprime auto loan delinquencies soar to record highs. The latest data from Fitch Ratings reveals that 6.4 per cent of subprime auto borrowers are now 60+ days late on their car payments – an all-time high, surpassing peaks seen during the 2008 financial crisis and the COVID-19 pandemic. The divergence between subprime and prime borrowers is particularly stark, with the former’s delinquency rate climbing without pause since 2020. While the development is unlikely to be contagious, the escalation reflects a growing strain on lower-income households, exacerbated by high vehicle prices (averaging over US$50,000), interest rates above 7 per cent, and rising insurance and repair costs.
- Bankruptcy of PrimaLend Capital Partners. On October 22, 2025, Reuters reported subprime lender PrimaLend Capital Partners filed for Chapter 11 bankruptcy protection, listing assets and liabilities under US$500 million. As a key player in the “buy-here-pay-here” auto financing market, PrimaLend’s collapse reinforces the idea that there is distress in another sector catering to borrowers with poor credit. The company’s CEO, Mark Jensen, is quoted as saying the bankruptcy aims to restructure rather than disrupt existing loans. The move, however, reportedly follows months of unpaid creditors, as noted by Bloomberg, pointing to deeper liquidity issues.
- High-profile warnings from market veteran legendary short-seller Jim Chanos has identified “lots of red flags” at Carvana, a major online used-car retailer, amid the auto loan crisis. Carvana’s shares plummeted 13 per cent on October 22 following Chanos’s comments. Similarly, when JPMorgan Chase CEO Jamie Dimon’s warned recently that “the credit cycle has changed” and “the lowest rungs almost always go first”, one cannot help but recall the global financial crisis (GFC) when subprime distress lead to broader credit tightening.
- Regulatory alarm bells The Bank of England’s Governor Andrew Bailey has drawn parallels to the 2008 financial crisis, citing the resurgence of “slicing and dicing” of complex loan structures in private credit markets. The collapses of U.S. companies, First Brands and Tricolor, have been described as “canaries in the coalmine,” prompting. I don’t know if the issues are systemic, but it remains the case that equities are expensive. We have had three very good years, and rebalancing portfolios is always prudent, especially when alternative asset classes offer diversification benefits without sacrificing returns. Meanwhile, the BoE’s Deputy Governor, Sarah Breeden highlighted concerns over high leverage, opacity, and weak underwriting standards – factors that could amplify any contagion.
- Anecdotal Evidence of Reckless Borrowing Social media is replete with rubbish but one post from @CollinRugg about two illegal immigrants in Phoenix owing US$420,000 with no repayment intent, underscores a troubling trend of unsustainable debt. Earning just US$6,000 monthly yet avoiding taxes, these individuals reflect how lax lending standards may have fuelled a bubble.
Are these fissures in the bull market?
The bull market, buoyed by the artificial intelligence (AI) thematic, reasonably robust corporate earnings growth and accommodative liquidity, has pushed equity valuations to levels that seems overstretched. The Shiller price-to-earnings (P/E) ratio, for instance, currently hovers near historic highs, as does the Market-cap-to-GVA (gross value added). Both suggest distortion and fuel the idea that any macroeconomic shock or earnings disappointment could trigger a sell-off.
What if, for example, a subprime auto loan crisis acts as a catalyst?
With over US$1.66 trillion in outstanding auto debt – auto loans are the second-largest consumer debt category after mortgages. Rising delinquencies could erode consumer confidence as well as spending power. Even if it shaved just 0.5 per cent off GDP it would be non-trivial, especially when combined with inflation. Stagflation anyone?
Moreover, the concentration of consumer credit in just four major U.S. banks heightens the risk. A sufficient number of repossessed vehicles and uncollectible debts could potentially strain balance sheets if subprime lenders like PrimaLend are indicative of a broader trend.
Meanwhile, the return of complex loan securitisation, does mirrors pre-2008 practices that amplified the subprime mortgage crisis. I am not suggesting this is the GFC 2.0, but when market valuations are stretched, investors only need to start worrying about such a scenario for markets to fall sharply. And if auto loan defaults trigger losses in asset-backed securities (ABS), investors in these instruments – often institutional players – could face material write-downs, sparking a sell-off.
Look, bottom line is the market has done a great job climbing a wall of worry. That is what bull markets do. But after three years of brilliant returns from equities, and with an unpredictable administration in the Whitehouse why wouldn’t investors consider rebalancing by rotating profits into sectors less sensitive to consumer credit, such as utilities or healthcare (which have outperformed in the last month), bolstering cash reserves to capitalize on potential dips, or rebalancing into more defensive asset classes such as successful and carefully selected Australian private credit funds or arbitrage funds.
The bull market has been resilient, but these subprime auto loans present a tangible crack. Whether this evolves into a full-blown correction depends on contagion and policy responses. For now, these fissures are a warning sign offering investors an opportunity to reflect on their portfolio’s asset weightings.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
