In a recent report, Morgan Stanley analysts explored the European auto and auto parts market and revealed their outlook for the sector. Analysts see little upside remaining in the space from current levels.

Reaching A Cyclical Peak

Analysts use the Dow Jones STOXX Autos Index (the SXAP) as a gauger of where the European auto market currently falls in its market cycle. According to the report, the SXAP is now 25 percent above its 200-day moving average, suggesting that auto stocks could be overbought.

The SXAP has only been this far above its 200-day average three other times in the past 25 years: 1999, 2007 and late 2010. According to analysts, if these other three times are any indication of what to expect in 2015, investors should be cautious. “Each time, the sector ran further 5-15%, but then fell 35-55% from the peak 2-6 months later,” analysts explained.

According to the report, autos are the best performing sector in Europe so far in fiscal 2015, and have been the best performing sector overall since 2013.

Near-Peak Valuation

Analysts see long-term valuation levels in the European auto sector approaching 2007 peak extremes, including metrics such as price-to-sales ratio and price-to-book ratio. According to the report, a recovery in European car demand in the near term is unlikely, suggesting that many auto stocks are fully valued at current levels.

Individual Names

A graph of the price to earnings ratio relative to that of the local market versus the long-term historical average shows that names such as Faurecia, Valeo SA and Continental AG have the highest current valuation relative to recent years. The Goodyear Tire & Rubber Co GT 1.37%, Mazda and Mitsubishi Motors have the lowest valuation.

American giants Ford Motor Company F 0.5% and General Motors Company GM 0.11% have valuation levels currently near historical averages.

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