Saturday, August 23, 2025

Research Affiliates: The EV Industry is a ‘Big Market Delusion’

It appears that the EV space is due for a big reality check.

That is, according to Rob Arnott of Research Affiliates, who suggests that current astronomical EV company valuations are the result of a “pricing delusion” that has enveloped the market. “The electric vehicle industry, with its astronomical growth in market-cap over the 12 months ending January 31, 2021, is a prime example of a big market delusion,” he said in a paper titled “The Big Market Delusion.”

In the paper, Arnott characterizes market delusion as a situation where companies in a particular industry rise together, despite the fact that they are direct competitors to one another. In order for technology stocks to deliver significant fortunes to investors, there need to be barriers to entry that would otherwise allow a company to earn returns that greatly exceed the cost of capital for a long duration of time.

Arnott brought attention to the valuation of Tesla, which has risen to be nearly on par with the $1.1 trillion valuation of traditional automakers. “At that market capitalization, Tesla accounted for about 75 percent of the total EV group’s market value and 35 percent of the market value of the entire auto industry. Such an immense market capitalization makes sense only if the expectation is that Tesla will come to dominate the entire auto industry, not just the EV market,” he explained.

Arnott said that such a valuation would be correct in the event that Tesla was taking market share away from other similar manufacturers, which it hasn’t been doing. In fact, the reverse is actually happening: when Tesla’s shares skyrocket, so do those of competing EV companies. “All of these companies are priced as if they are going to be huge winners, but they are competitors. They cannot all assume dominant market share in the years ahead,” he argued, noting that such valuations are not sustainable in the long run.

In short, the EV industry is a perfect example of the “big market delusion,” because despite the market sensation behind electric vehicles, the auto industry will continue to remain highly competitive and very capital intensive. This means that not every auto manufacturer can become a winner. So, as the EV competition becomes more heated, an increasing number of companies will likely fail, ultimately bringing the valuation of the EV industry to more justifiable levels.


Information for this briefing was found via Research Affiliates. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

One Response

  1. Its already understood the EV market is a horse race and not every horse will be a winner. But like in a real horse race, bets are placed on a lot of horses even though they can’t all be winners – does it make sense to bet on those eventually loosing horses? Is horse betting irrational? The analyst seems to think so.

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