(Bloomberg) — So much bad news is priced into European auto stocks that some see Volkswagen AG’s profit warning as further evidence that things can only get better for the struggling sector.
The automobiles and parts index is the second-biggest laggard of 2026, but lately there have been signs that it is turning the corner. The group has climbed 3.2% since the end of June while the market was flat, helped by the prospect of protectionist measures and major cost cuts.
The nascent recovery was severely tested on Friday as Volkswagen, Europe’s biggest carmaker, slashed its profit forecast and said it expects an operating margin of no more than 1%. The news drew an analyst downgrade, but ultimately triggered only a brief selloff among peers. The sector rebounded on Monday.
Goldman Sachs Group Inc. analyst Christian Frenes said the announcement was “material in optics but limited in incremental information content.” He added that the company “is largely aligning its assumptions with market realities that have been evident for some time.”
The autos sub-index has slumped 16% this year as carmakers buckled under the twin impacts of competition from cheaper Chinese models at home and weak consumer spending in the Asian country, historically a big market for the likes of Mercedes-Benz Group AG and BMW AG.
Investors are betting that European regulators have taken note of carmakers’ travails. An October deadline to address trade imbalances between the EU and China has come with an expectation that Europe will attempt to limit the availability of cheap Chinese cars in the region. European leaders have blamed a record trade disparity on overcapacity and unfair trading practices by China, charges Beijing denies.
“If regulators go further and compel Chinese OEMs to source from western suppliers and comply with the full breadth of European regulations, their cost advantage could diminish materially,” RBC analyst Tom Narayan wrote. That would limit market-share losses for European carmakers “to just a few percentage points,” he added.
A rebound in Europan economic indicators at home is also likely to boost auto shares. Germany’s business outlook improved for a fourth month in August, and the gauge is expected to show further expansion this week.
Cost-reduction efforts are also bearing fruit. Porsche AG this month raised its automotive net cash flow margin due to the sale of a stake in the venture that owns Bugatti. Meanwhile, Volkswagen’s complex turnaround efforts have been well received.
“The market says: if you can fix VW, you can fix other OEMs, too,” said Daniel Schwarz, an analyst at Bankhaus Metzler. Sentiment toward VW has been boosted mainly by the restructuring agreement between management, unions, the Lower Saxony government and the Porsche-Piech family.
Others are more skeptical, given that earnings estimates continue to decline. Goldman strategist Sharon Bell said she would be underweight autos, while at UBS Group AG, Patrick Hummel said the real-world benefit of any regulatory changes appears limited. He also warned of potential retaliation from China, which German premium carmakers would feel most keenly.
Investors are also only slowly returning to the sector. Autos are now the second most underweight industry group after retail, according to September’s Bank of America Corp. fund manager survey. That’s a slight improvement from being the most unloved sector in July and August.
And there’s a big divergence in performance within the autos subindex. Stellantis NV has lost more than half its value this year, tracking its third straight annual decline. Investors are unconvinced by its plan to turn around the US business of its critical Jeep unit.
The sector’s valuation outlook is also mixed. Car stocks remain the cheapest offering in Europe, trading at 8.6 times forward earnings estimates, while the wider market sits at 15. But on both an absolute and relative basis, valuations are above the long-term average.
One potential catalyst is that some analysts are souring on Chinese automakers. JPMorgan Chase & Co. recently warned of weaker domestic demand, rising policy uncertainty and higher memory price costs for Chinese electric vehicles. That could prompt market participants to take another look at European carmakers.
“What gets better? That is what investors want to know about a sector that has long been weighed down by numerous headwinds,” said Pushkar Tendolkar, an analyst at HSBC Holdings Plc.
–With assistance from Michael Msika and Matt Clinch.
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