• Mercedes shares fell more than 6% Friday after becoming the latest carmaker to cut its 2024 guidance.
• The German carmaker cited weaker demand from China as the main driver of the downgrade.
• The auto sector was dragged lower on the announcement, with Volvo and Stellantis shares also dropping.

Mercedes shares fell more than 6% Friday after becoming the latest carmaker to cut its guidance this year as sluggish demand in China and trade disputes weigh on the sector.

The company said late Thursday that it now expects group earnings before interest and taxes (EBIT) to come in "significantly below" the previous year and that its adjusted return on sales would be between 7.5% and 8.5%, down from its earlier forecast of 10% to 11%.

Shares pared losses slightly to end 6.8% lower by the session close.

The auto sector was dragged lower, down 3.6%, as Volvo and Stellantis fell 4.5% and 3.4%, respectively.

Mercedes' revision was triggered by a "further deterioration of the macroeconomic environment," primarily driven by weaker Chinese consumption and a prolonged downturn in the country's real estate sector, the firm said in its Thursday statement.

"This affected the overall sales volume in China including sales in the Top-End segment. Overall, the sales mix in the second half of 2024 is expected to remain unchanged versus the first half, and therefore weaker than originally expected," the company said.

Fellow German automaker BMW also recorded steep losses last week after lowering its 2024 profit margin outlook due to slumping sales in China and an issue with a braking system supplied by Continental.

Volvo Cars earlier this month also scaled back its margin and revenue targets, after announcing it was no longer targeting 100% all-electric vehicle sales by 2030.

Analysts from UBS said Mercedes' outlook revision was "not surprising" given the current pressures from China, but they noted that the scale of the warning compared to the firm's peers would likely spark trepidation from investors and lead to further downgrades.

"The fact that MBG's [Mercedes-Benz Group's] profit warning is bigger than BMW's and that it's not related to a big recall will leave the market puzzled about underlying profitability and capital allocation going into 2025," they wrote in a Thursday note.

The European auto sector has come under increasing pressure as it attempts to navigate rising trade tensions between the European Union, the U.S. and China.

Germany, whose economy is heavily dependent on the auto industry, has been vocal in its opposition to EU tariffs on Chinese EVs, saying the plans could stifle business in one of its biggest markets.

"The Chancellery, led by Olaf Scholz, a Social Democrat, is indeed very skeptical of those tariffs and is letting everyone in Brussels know about that," Carsten Nickel, managing director at Teneo, told CNBC's "Squawk Box Europe" on Friday.

The EU and China on Thursday agreed to further talks about the measures and could re-examine a minimum-price deal previously rejected by Brussels, the European Commission said.

Nickels said the move was an indication that China's "carrot and stick" approach to negotiations appeared to be working to a certain degree, and that the EU may now be more willing to consider measures such as quotas, minimum prices and maximum quotas.