Goldman Sachs expects Nvidia ’beat and raise,’ lifts price target to $240
Investing.com -- Morgan Stanley said the U.S. consumer credit cycle is showing a widening gap between prime and subprime borrowers, as stress builds at the lower end of the market while higher-income households remain resilient.
Strategist Vishwanath Tirupattur wrote that the collapse of subprime auto lender Tricolor has intensified scrutiny of underwriting and servicing standards across the asset-backed securities sector.
Data show that subprime borrowers are under mounting strain, while prime credit remains solid.
“Subprime auto loan delinquencies (~5.93%) are hovering near all-time highs, and lending standards in that segment have loosened,” Tirupattur said, pointing to rising debt-to-income and loan-to-value ratios.
Prime auto loans, by contrast, are performing well, with delinquencies down year-over-year and cure rates improving.
Tirupattur said recent bank earnings suggest that core asset quality “remains intact,” as major lenders reported delinquencies largely in line with or better than expectations.
Fifth Third Bancorp’s review of its auto-backed portfolio found discrepancies in only 2 out of 120,000 loans, reinforcing the view that the Tricolor case may be an outlier.
Still, investor sentiment toward subprime auto credit “will likely remain weak” until confidence in servicing practices is restored.
The strategist said this divergence mirrors broader household trends identified by Morgan Stanley’s U.S. economists, who point to sharp differences in income and net worth.
The top 20% of households hold over 70% of total wealth and continue to benefit from strong wages, asset gains, and limited inflation exposure, while the bottom 40% hold just 7.4% of wealth and are hit harder by slower job growth and higher costs.
“The strength of upper-income consumers explains why the consumer in aggregate remains relatively healthy,” Tirupattur wrote. But he warned that lower-income segments are likely to stay under pressure amid tariffs and inflation.
A broader credit downturn, he added, would require “a major shock,” such as a sharp rise in unemployment or a significant equity market correction—neither of which is currently in Morgan Stanley’s base case.