Buyers in the DAX are unusually active this year, bringing the index within just over 1% of its record high. Traditionally, this time of year is associated with weaker price movements, yet the ongoing capital shift from the U.S. to Europe, particularly Germany, continues as investors look to avoid the uncertain tariff policies of the U.S. government. The trade dispute remains a source of significant uncertainty for the U.S., as illustrated by the newly imposed 50% import tariff on copper.
The German economy is somewhat insulated from these uncertainties, buoyed by domestic economic activity within Europe and a recovery in East Asia. In the best-case scenario, Germany could avoid further recession this year and return to growth in the next. This potential development is already reflected in the DAX, as investors generally look three to six months ahead in the stock market.
Currently, the DAX has a price-to-earnings ratio (P/E) of around 16. While this sits at the upper end of its historical range since the mid-2000s (between 8 and 16), it remains on the lower end compared to the previous two decades (between 16 and 33). Investors considering new purchases must rely on a fundamental revaluation of German stocks; otherwise, they risk entering the market at elevated prices.
The end of the German government’s austerity measures, significant military investments, and skepticism towards U.S. economic policies could create a golden moment for the German stock market. However, recent cancelled IPOs, such as those of Brainlab or Autodoc, suggest otherwise. The key speculation in the DAX revolves around a fundamental revaluation. Should the DAX revert to valuation levels seen between 1985 and 2005, significantly higher index levels—potentially even double—could be feasible.
Comment provided by Jochen Stanzl, Chief Market Analyst at CMC Markets.
