After two years of significant underperformance, the European automotive sector is finally showing signs of a turnaround. Could this much-hated sector become an outperformer in 2026? Europe’s car manufacturers are in a terrible place. The industry suffers from several structural pressures. For one, the transition to electric vehicles requires large investments as European manufacturers scramble to catch up with the technological advancements of EV juggernaut Tesla and Chinese manufacturers.
These investments will pressure European carmakers’ profit margins for years to come compared with the margins investors were used to before the COVID-19 pandemic. Meanwhile, lacklustre demand from Chinese consumers has weighed on growth for European carmakers while also pushing Chinese EV makers into the single market as they pursue their own growth ambitions. Chinese competitors have a distinct advantage here, as they benefit from significant state subsidies.
The European Union tried to level the playing field with tariffs on Chinese-manufactured EVs in 2024, but Chinese manufacturers have chosen to absorb most of the tariffs. Chinese EVs’ price advantage over European-made models has thus narrowed only slightly.
The result for European carmakers in the last two years has been declining growth in China and intensifying margin pressure in Europe. And just when things seemed like they could not get any worse, the U.S. imposed tariffs on European vehicles. These levies hit German luxury models like the Mercedes-Benz S-Class, BMW 7-Series and Porsche 911 particularly hard because they are manufactured domestically in Germany. The upshot has been a slump in share prices across the sector.
Since the start of 2024, the Stoxx Europe 600 Automobiles & Parts Index has underperformed the Stoxx Europe 600 by 35 per cent.
Yet after two very bad years, three recent developments may herald a reversal of fortunes. First, analysts think that the margin pressures that have dogged the industry for years are easing. Consensus estimates point to expanding margins in 2026 from the extremely low levels of 2025 as past cost cutting takes effect. Second, after two years of nonstop earnings downgrades, analysts have started to upgrade their forecasts, with earnings per share expectations for the Stoxx Europe 600 Automobiles & Parts Index rising 5 per cent since the middle of October. Third, investors are starting to warm to the sector.
In Sentix’s monthly survey of European investor sentiment, the automotive sector stood out in December, with institutional investors moving from net 35 per cent bearish positions in November to net 6 per cent bullish in December. Retail investors remain net 34 per cent bearish, but that is still an improvement from the net 55 per cent bearish level in November.
IN 2026? My own analysis suggests that the European automobiles and parts industry will enjoy earnings growth higher than the overall market’s in 2026. I have previously explained the building-block approach to earnings growth I use for long-term earnings forecasts. A similar methodology can be used to forecast 2026 earnings growth.
If we look at the real GDP growth in the regions where European manufacturers sell their cars and add the local inflation rate, we get an idea of the potential revenue growth in 2026. For the companies in the Stoxx Europe 600 Automobiles & Parts Index, that would amount to 4.5 per cent revenue growth in 2026 compared with 4.3 per cent for the Stoxx Europe 600 overall. I then incorporate analysts’ consensus expectations for profit margin changes.
Finally, I assume that companies will continue to buy back their shares at roughly the same rate as they did last year. The result is an EPS growth estimate for the automotive sector of 8.6 per cent in 2026 compared with 6.5 per cent for the Stoxx Europe 600. If this kind of earnings outperformance materialises, investors will likely continue to buy into the recovery, triggering an expansion of price-to-earnings ratios for automotive stocks, further boosting share-price returns. Admittedly, it is early in the turnaround and there are many risks.
On the one hand, the EU seems set to extend the transition period for phasing out internal combustion engines, which would allow companies to spread the related investments over a longer period of time, reducing the annual earnings hit. However, Chinese competitors continue to gain market share and may force European carmakers to accept even larger price reductions, further reducing margins. The U.S. government could also decide to raise tariffs on European cars if it judges that reshoring to the U.S. is not happening as fast as it would like. But there appears to be light at the end of the tunnel in the European automotive industry. Let’s hope it doesn’t turn out to be an oncoming train.
