Assessing the Impact of US Tariffs on European Automotive Stocks in a Post-EU-US Trade Deal Landscape

The July 2025 U.S.-EU trade deal, which reduced auto import tariffs from 27.5% to 15%, has redefined the competitive landscape for European automakers. While the agreement averts a full-scale trade war, it introduces significant headwinds for Volkswagen, BMW, and Mercedes-Benz—companies already grappling with the dual pressures of global supply chain shifts and the rise of Chinese EV dominance. Yet, amid these challenges, the sector's strategic repositioning and undervalued stock metrics present compelling opportunities for investors willing to navigate trade uncertainty.

Tariff Realities and Strategic Realignments

The 15% baseline tariff on EU car exports to the U.S., while lower than initially proposed, remains a critical strain on profitability. Volkswagen's H1 2025 operating profit dropped 33% to €6.7 billion, with tariffs costing €1.3 billion alone. BMW and Mercedes-Benz face similar pressures, with the former projecting a 1.25-percentage-point margin reduction in 2025. These figures underscore the urgent need for strategic adjustments.

European automakers are responding with nearshoring and vertical integration. Volkswagen has suspended imports from its Mexican plant to the U.S. and is exploring domestic manufacturing to secure tariff exemptions. BMW is investing $1 billion to retool its South Carolina plant for EV production, while Mercedes-Benz is leveraging the EU's Climate and Transformation Fund to accelerate green hydrogen and battery infrastructure. These moves, though capital-intensive, reflect a broader industry pivot toward localized production and resilience against supply chain disruptions.

Valuation Gaps and Long-Term Prospects

Despite the immediate financial strain, European automakers trade at substantial discounts to their fair value estimates. Morningstar analysts value Volkswagen at €172.00 (a 47% discount to current price), BMW at €117.00, and Mercedes-Benz at €90.00. These undervaluations are partly driven by trade uncertainty and margin compression but also highlight the sector's potential for recovery.

The key to unlocking value lies in the execution of nearshoring and EV strategies. Volkswagen's ID. lineup and U.S. manufacturing push, for instance, position it to capitalize on the growing EV market, albeit with near-term costs. BMW's San Luis Potosi expansion and San Luis Potosi's battery assembly center align with its Neue Klasse EV roadmap, while Mercedes-Benz's premium brand strength offers a buffer against margin erosion.

Macroeconomic Tailwinds and Risks

The EU's Alternative Fuels Infrastructure Regulation (AFIR) and Germany's National Hydrogen Strategy provide additional tailwinds. By 2030, AFIR mandates 1.8 million public EV charging points in the EU, creating infrastructure demand that could boost automakers with green tech investments. Meanwhile, hydrogen's role in decarbonizing heavy transport and energy storage positions firms like Mercedes-Benz to benefit from long-term structural trends.

However, risks persist. The U.S. government retains authority to raise tariffs if the EU fails to meet its $600 billion investment commitment. Additionally, geopolitical tensions and China's EV dominance in Europe threaten to erode market share. For example, Mercedes-Benz's U.S. van division faces stiff competition from Chinese rivals, while Volkswagen's reliance on China for EV battery materials exposes it to supply chain volatility.

Investment Thesis: Balancing Opportunity and Caution

For investors, the European automotive sector offers a mix of undervaluation and strategic momentum. Volkswagen, with its aggressive U.S. nearshoring and EV focus, represents a high-conviction long-term play, though its current valuation reflects significant execution risk. BMW's balanced approach—leveraging U.S. manufacturing while maintaining its premium brand equity—makes it a more conservative bet. Mercedes-Benz, while less transparent in its U.S. plans, benefits from a high-margin product mix but requires closer scrutiny of its China and van market exposure.

A diversified portfolio across these names, coupled with a focus on macroeconomic trends like green infrastructure, could yield asymmetric returns. However, patience is essential. The sector's path to profitability hinges on resolving trade uncertainties, executing costly production shifts, and navigating the competitive EV landscape.

Conclusion: A Sector at a Crossroads

The U.S.-EU trade deal has forced European automakers into a period of strategic repositioning. While tariffs and market shifts pose near-term challenges, the sector's undervaluation and long-term resilience strategies create compelling opportunities. Investors who prioritize firms with strong U.S. manufacturing footholds, clear EV roadmaps, and exposure to green infrastructure may find themselves well-positioned to capitalize on the next phase of this evolving industry. As the trade deal's full implications unfold, a disciplined, forward-looking approach will be key to unlocking value in this dynamic sector.