European carmakers face a delicate trade-off next year between a potential easing of CO₂ emissions rules and a possible return of fierce competition from China. That's according to Horst Schneider, head of European automotive equity research at Bank of America Securities , who said cheaper auto stocks, "still have got catch-up potential" and are well-placed to advance in 2026 thanks to the regulation changes. He said the car sector generally performs well during the first quarter, later seeing a drop-off before increasing again towards the end of the year. "I could imagine we have the same pattern in 2026," he told CNBC's "Europe Early Edition" on Friday. Schneider pinpointed Ferrari as a key pick for 2026. He noted that while the luxury Italian sports car manufacturer has de-rated and was among the weaker performers lately, its discount suggests there remains a "very good" risk-reward ratio in the stock. Schneider said that Ferrari continues to be "intentionally cautious" as it prepares to launch its first EV in October. RACE-IT YTD mountain Ferrari. "They are always, at the beginning of a year, at the beginning of a planned period, more conservative," he said. "They usually raise guidance once a year, and I would expect them also to raise the guidance for the five-year plan at least once. So that could be '27, it could be '28, but I think it comes." The European Commission is preparing to roll back measures that would restrict the sale of internal combustion engine vehicles within the EU from 2035. The move marks a major reversal of CO₂ emissions rules that could boost under-pressure carmakers in the bloc, where electric vehicle demand still lags the U.S. and China. Schneider said: "When you look at the regulatory trends, maybe [Ferrari] can launch again, more ICE projects towards the end of the decade, and that also drives the margin. So therefore I've got no concerns that they don't achieve the target." Schneider indicated that valuation for autos "is never expensive" in the sector more broadly. "The multiples are basically pulled up by stocks like Ferrari. If you take Ferrari out… a lot of companies still trade single-digit P/E. When you look, for example, at stocks like Volkswagen , Renault , those companies most exposed to Europe still trade on four or five times earnings, so they are still amongst the cheapest stocks you can have in the sector." Schneider said such names were priced for "significant negative terminal growth," but easing CO₂ rules could help them rerate as long-term survival expectations improve. "If there's no change on CO₂ regulation, it means not that the 2026 outlook is changing, it means the long-term outlook is changing," he said. "It means you may go from a negative terminal growth of -100% to -50%. That means that maybe these stocks can re-rate from four times to five times earnings. It's a 25% return." Elsewhere, Schneider pointed to Continental , which could unlock a sizeable special dividend with a potential 5 billion euro ($5.9 billion) sale of its ContiTech division, which manufactures belts, hoses, springs, and other technology for industrial and automotive companies. He also said small-cap components supplier Aumovio trades at a steep 40–50% discount to peers, providing a potentially attractive entry point for investors. CON-DE YTD mountain Continental.
