What happened

Shares of used car dealers CarMax (KMX -2.21%) and Carvana (CVNA 0.68%) are higher by 8.3% and 11.9%, respectively, as of 11:03 a.m. ET Tuesday following an impressive earnings beat from one of the two names. Investors are presuming the same good fortune is being experienced by the other.

So what

CarMax topped analysts' earnings estimates of only $0.24 per share for the three-month stretch ending in February with its actual per-share profit of $0.44. Cost-cutting and surprisingly firm prices for used automobiles overcame the slightest of misses of revenue expectations. The same tailwind bodes well for rival Carvana.

The earnings beat, however, is a dubious victory. CarMax's revenue slumped more than 25% during its fiscal fourth quarter, with unit sales to retail customers falling 12.6% year over year. Wholesale unit sales slipped 19.3%. Although up for the full year, average retail selling prices were also down 9.3% year over year for the quarter in question; the average selling price of wholesale vehicles fell nearly 28% during the fourth quarter. Per-share profits themselves fell from the year-ago comparison of $0.98 on a 25.6% setback in sales.

And there's no real relief on the near-term horizon either. A forecast from Cox Automotive suggests the sheer supply of used cars available to sell in 2023 will be roughly 30% lower than pre-COVID 2019's supply. For 2025, that supply will still be more than 20% below 2019's tally. Meanwhile, J.P. Morgan believes used car prices will end 2023 about 10% below where they started the year, with higher interest rates and economic uncertainty crimping demand following 2021's cyclical peak in used car prices, strength that drifted into 2022 but is starting to measurably crumble now.

Now what

The knee-jerk response makes enough sense on the surface. The steep sell-off CarMax shares have suffered since late 2021 reflects the used car industry's inevitable problems following 2021's frenzy. Ditto for Carvana. The two outfits are in the same business, and their fates are tethered to one another.

In both cases though, the bigger-picture challenge is still the same, and still overwhelming. Today's rallies are only rooted in today's headlines regarding CarMax's earnings beat. It is a relative win. But both businesses are still fighting a steep uphill battle. It's too soon to be excited about buying either stock.