European car stocks tumbled almost 4% on Monday after a warning from Stellantis, Volkswagen, and Aston Martin rekindled concerns over the sector's earnings outlook in a year marred by slowing demand and aggressive Chinese competition.

The rout wiped off nearly $10 billion from the market value of the Stoxx Auto & Parts index, with Stellantis, listed in Paris and Milan, falling 14% after slashing forecasts and saying it would burn more cash than initially expected. Stellantis, Europe's fifth-largest carmaker by market value and owner of the Chrysler, Jeep, Fiat, Citroën, and Peugeot brands, cited worsening industry trends, higher costs to overhaul its US business, and Chinese competition on electric vehicles.

Volkswagen, another major player in the sector, cut its annual outlook for the second time in less than three months amid union disputes over planned factory closures. Following this announcement, Volkswagen shares dipped 2.6% in Frankfurt. Aston Martin also reported troubling news, warning investors about lower annual core profits and production volumes, mainly due to supply chain disruptions and weak demand from China. This led Aston Martin shares to plummet 20% in London.

Earlier in the month, both Mercedes-Benz and BMW downgraded their own forecasts due to weakening demand in China, the world's largest car market. These downgrades are reflective of broader challenges facing the European auto industry, which is undergoing significant structural shifts due to global competition and increasing demands for electric vehicle innovation.

Analysts forecast a near 14% earnings drop in 2024 for the European auto sector, marking a stark reversal from the years following the pandemic when supply chain disruptions allowed carmakers to hike prices. Citi analysts expect sector weakness to persist in the coming weeks, with a potential recovery not likely until 2025 when Stellantis and others reset their inventories. This pessimistic outlook suggests that even traditionally strong players are struggling to adapt to new market conditions.

Despite economic stimulus measures from Beijing, sentiment towards European car shares remains bleak. This is evidenced by the near-record 60% discount to the market based on a price-to-earnings ratio reported by LSEG Datastream estimates. Even with rock-bottom valuations, cars are the most underweighted sector among regional fund managers, overseeing some $284 billion, according to a Bank of America survey.

As the global market continues to evolve, the European auto sector must adapt swiftly to avoid falling behind. Rising competition from innovative electric vehicle manufacturers, especially those based in China, underscores the need for robust strategic pivots. This is crucial for maintaining competitive advantages in an industry increasingly driven by technological advancements and sustainable practices.