It took one headline from Washington to bring European car stocks out of their slump. On Wednesday morning, after Japan secured a surprise trade agreement with the United States that slashes import tariffs on Japanese vehicles from 25% to 15%, shares of major European automakers rose.
According to CNBC, major European auto stocks were up nearly 5% or more. Volvo Cars shot up 7%, touching its highest point since mid-May. German heavyweights followed close behind, with Volkswagen gaining nearly 7%, BMW rising by 4%, and Mercedes-Benz climbing 4.9%. Even Stellantis and Renault, which have faced tough investor sentiment this year, rallied by about 3% each. In total, the Stoxx Europe 600 Autos Index jumped 3.4%, far outperforming the broader Stoxx 600, which edged up just 0.9%.
The reason? Optimism. If Japan could broker a more favorable trade deal with the U.S., maybe Europe can do the same. The U.S. is the EU’s second biggest auto market after the United Kingdom, and in 2024 alone, the Bloc exported nearly 758,000 cars to the U.S., worth over €38.9 billion. For many European brands, the U.S. market remains both lucrative and strategic. The European Commission is now in high-stakes negotiations with U.S. trade representatives to avoid sweeping 25% tariffs that President Trump has threatened to impose.
The downward trend for EU manufacturers began earlier this year, following President Trump’s announcement of sweeping tariff plans back in April, including on European car imports unless a new deal was reached by August 1. This was in light of a “gross imbalance” in vehicle trade and a need to protect American manufacturing. The administration gave the EU a four-month window to reach a deal. The announcement sent shockwaves through the market. European automakers were already dealing with razor-thin margins, and the threat of additional tariffs on their U.S. exports hammered investor confidence.
But the tariff threat isn’t the only problem for European automakers as the sector is being squeezed on multiple fronts owing to a strong Euro, which has made European exports more expensive. Additionally, Chinese brands like BYD and Xiaomi are now flooding the European market with competitively priced EVs, putting downward pressure on prices and domestic automakers in the Bloc. This has prompted EU investigations into state subsidies and calls for new countermeasures.
Meanwhile, consumer demand remains soft and sales of new cars in Europe rose just 0.1% in the first five months of 2025, according to Focus2Move. That stagnation, combined with the massive capital outlays needed for EV development, has weighed heavily on profits.
Even with Wednesday’s rally, European auto stocks are still down more than 5% for the year, while the broader Stoxx 600 is up 7%. Ferrari remains the exception, with its luxury status and increasingly diverse portfolio. For now, the market is hoping that Brussels can replicate Tokyo’s diplomatic success by the end of the month.
Image Source: Volkswagen
