Mercedes has lowered its forecast due to a decline in demand for luxury models. Why did its stock price jump?

Mercedes-Benz has lowered its sales forecast for 2026 following another setback in China—a key market for its high-end S-Class and Maybach models. But the German automaker’s stock rose sharply: investors focused not on the forecast revision, but on signs of a profit recovery.

On July 28, Mercedes announced that it now expects a slight decline in group revenue and passenger car sales in 2026, although it had previously anticipated maintaining them at last year’s level. Both adjustments were made in light of the continuing challenging market conditions in China, according to the company’s report. The group confirmed its key guidance for investors regarding the adjusted return on sales for the passenger car business, which is 3–5%.

The automaker’s revenue for the second quarter fell 3.3% year-over-year to €32.1 billion. Sales in the passenger car division dropped 7.9%: in Europe, they rose by 4%, and in the U.S., by 10%, but this only partially offset the 30% slump in China. Excluding China, global sales rose by 2%, the report notes.

Adjusted return on sales (RoS) for the passenger car business was 4%, compared with 5.1% a year earlier. The segment’s adjusted operating profit (EBIT) fell by 26% to €909 million. The same figure, before adjustments, fell by nearly 94% to €49 million; this included a €704 million write-down on holdings in Chinese companies. This did not result in a comparable cash outflow in the second quarter and was not included in the calculation of the adjusted figure, according to the quarterly report.

It was that very 4% profit margin that won over investors. Analysts had expected it to drop more sharply following the decline in shipments and revenue, but the figure remained within the projected range of 3–5%. Cost cuts and reduced development expenses supported profitability, Bloomberg reports, citing Citigroup analysts led by Harald Hendrix. Strong results from the financial services division also helped, the agency notes.

Mercedes’ EBIT, taking one-time factors into account, increased by 21.5% to €1.55 billion. According to Handelsblatt, this marks the first increase in three years. This growth was not driven by passenger cars: EBIT for the Vans division rose by 83% to €502 million, and for the financial services segment, by 92% to €475 million.

As a result, despite the revised forecasts, Mercedes shares in Frankfurt jumped 4.4% at the start of trading—the strongest intraday gain since early May, according to Bloomberg. The gains then slowed to 3%. However, the stock has fallen by more than a fifth since the start of the year.

Mercedes is not the first German automaker to lower its expectations. Late last week, Volkswagen cut its revenue forecast, and Audi followed suit early this week. BMW had already warned in mid-June of a decline in group profits and margins in its automotive business, according to Handelsblatt.

BMW and Mercedes are locked in a price war in the Chinese market that is eroding both companies’ profits, according to Bloomberg. The electric Mercedes CLA and other new models are barely holding their own against local brands, which offer buyers more electronics and options. Mercedes is finding it difficult to move up the price ladder, the agency notes: its focus on luxury has made the company more dependent on affluent buyers just as the Chinese economy is losing momentum.

On top of the challenges in China, there are U.S. tariffs and sluggish demand in Europe. The war in the Middle East has become a new problem for Mercedes: it is driving up material costs and dampening demand in the Gulf states, where high-margin luxury models have traditionally been purchased, according to Handelsblatt.

According to MarketScreener data, none of the major banks revised their ratings following Mercedes’ earnings report. UBS reaffirmed its “Neutral” rating on the stock with a price target of €50, Jefferies maintained its “Buy” recommendation and a target price of €52, while JPMorgan kept its “Overweight” rating with a target of €70. On July 28, Mercedes shares were trading around €47 in Frankfurt.

The consensus recommendation from 23 analysts on Mercedes shares is “Outperform” (equivalent to a “Buy” recommendation), and the average price target implies a 29% increase, according to data from S&P Global cited by MarketScreener. The picture is similar for BMW: the consensus is “outperform” with a 28% upside potential. For Volkswagen shares, the consensus is also “outperform,” but the upside potential is twice as high—50%. For Porsche, the recommendation is “Hold” with an upside of 4%.

This article was AI-translated and verified by a human editor