Germany finds itself in an unusual position: its flagship stock market index, the DAX, is hitting record highs even as the national economy faces its second consecutive year of contraction. This contrast between stock market performance and economic stagnation reveals fascinating insights into Germany’s economic landscape and offers important considerations for investors.
In 2024, the DAX Index, which tracks 40 of Germany’s largest publicly traded companies, surged to record levels despite the economy shrinking by 0.1% in the final quarter of the year, following a flat 2023. Projections for 2025 remain modest, with Deutsche Bank anticipating growth of just 0.2% and the IMF at a slightly higher 0.3%. While regional neighbors like France and even the struggling U.K. are forecasted to grow at faster rates, the DAX has thrived due to its unique sector composition and global focus.
Over half of the DAX’s value comes from companies in technology, software, and manufacturing—industries that benefit from strong international demand. For example, SAP, Germany’s renowned software giant, led the index’s performance in 2024, contributing 7.8% of its growth. Other heavyweights such as Deutsche Telekom, Siemens AG, Allianz, and Munich RE added significant gains, collectively accounting for 98% of the DAX’s returns for the year. These companies, with their international reach, are far less dependent on Germany’s tepid domestic economy.
Meanwhile, the broader German economy tells a different story. Traditional industries like automotive manufacturing, once a symbol of national strength, face mounting competition, particularly from Chinese electric vehicle makers. Housing has also emerged as a pain point, with soaring construction costs and rising interest rates stalling development. As a result, mid- and small-cap companies—more reliant on domestic consumption—have performed poorly. The MDAX, tracking mid-sized firms, dropped 5.71% in 2024, while the SDAX, representing small caps, declined 1.78%.
An essential part of the DAX’s resilience lies in its global orientation. The companies listed on the index generate around 80% of their revenue from exports, with 24% coming from the United States alone, compared to just 20% from Germany’s domestic market. This international diversification has shielded DAX-listed firms from the country’s weak internal demand, further exacerbating the disconnect between the stock market and Germany’s overall economic health.
Economist Marc Ostwald underscores this divergence, noting that the DAX’s recent highs highlight “the disconnect between the domestic economy and export-oriented multinationals.” Nevertheless, he points to the relatively affordable valuation of the DAX, with a price-to-earnings ratio of 15.7—much lower than the 25.2 of the S&P 500. While this affordability may attract global investors, Ostwald cautions that it also reflects Germany’s deeper structural challenges, such as its aging infrastructure and declining industrial competitiveness.
Looking ahead, some optimism is tied to Germany’s February 2025 federal elections. A new administration could seize the opportunity to implement reforms aimed at reviving industrial growth and stimulating the broader economy. However, political uncertainty looms large, leading many investors to take a cautious, wait-and-see approach.
Equity analyst Stephan Bauer suggests that mid- and small-cap stocks could experience a recovery in 2025, especially if government policies address these economic challenges. That said, the immediate outlook remains challenging for domestically focused sectors. For now, the DAX serves as a beacon of stability and opportunity, driven by its globally oriented giants.
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