The DAX , a benchmark of 40 German blue-chip stocks hit a record high on Monday, despite a disappointing GDP print out of Germany — and it’s not the first time Germany’s stock market and its economy have diverged considerably. Europe’s largest economy contracted for the second year in a row in 2024, but the DAX logged price gains of 20.31% in 2023 and 18.85% last year, according to FactSet data. Here is why. .GDAXI 5Y line The DAX is a poor proxy for the German GDP For a start, the sector sizes of the German economy differ wildly from the DAX’s industry weights. For instance, the manufacturing, software and technology sectors add up to more than 50% of the stock market, according to a Jan. 20 note from Deutsche Bank, but represent a much smaller proportion of the economy. In addition, while public sector activity is accounted for in the economy, it’s entirely absent from the stock market. The composition of the DAX has also changed much faster than that of the economy over the past decade. About 10 years ago, automakers dominated the stock market with 17%. Today, they make up only 7%, according to Deutsche Bank. The reverse is true for the technology sector, which has grown from a weight of 8% to 18% over the same period. The key stocks driving the market higher The companies that are listed on the stock market also have a very different profile to the way the economy is calculated. “One reason behind the divergence between Germany’s weak economic growth and the strong DAX performance is due to the strong export exposure of DAX companies,” said Deutsche Bank strategists. DAX companies make 80% of their money outside of Germany, according to the investment bank. In fact, German companies sell more to American (24%) than they do in Germany (20%) as a proportion of their overall sales. Germany’s economy, however, is calculated mostly on domestic demand. Only a handful of companies have driven the German stock market over the past two years, mimicking the effect that the Magnificent 7 has had on the S & P 500 . For instance, software giant SAP alone contributed 7.8% to the DAX’s performance in 2024, according to Deutsche Bank. SAP, alongside Deutsche Telekom , Allianz , Siemens AG , Siemens Energy , Munich RE and Rheinmetall made up 98% of DAX’s total returns last year. Without them, the index would have been up just 5% in 2023, compared to its outturn. Germany’s sluggish economy While the DAX has been on the rise, the German economy has been sluggish for some time, with its full-year gross domestic product declining consecutively in 2023 and 2024. Quarterly GDP readings have also been muted, hovering around the flatline throughout 2023 and 2024, but skirting a technical recession. An early preliminary reading of the country’s fourth-quarter GDP for 2024 from Destatis last week indicated a 0.1% decline, which Deutsche Bank Chief Germany Economist Robin Winkler at the time suggested was cause for concern and evidence that the economy failed to maintain momentum again. There appears to be little respite on the horizon, with Germany’s Bundesbank forecasting 0.2% growth for 2025 in calendar-adjusted real GDP terms, while the latest projections from the International Monetary Fund estimate 0.3% growth over the period. This puts it far behind other major European economies such as the U.K. and France, which the IMF says are expected to grow 1.6% and 0.8% in 2025, respectively. The fund anticipates the euro area will expand by 1% this year. Several issues are weighing on the economy, ranging from a long-standing crisis in the housebuilding sector — attributed to higher interest rates and construction costs — to sluggishness in key industries, such as autos, which has been linked to the shift towards electric vehicles and Chinese competition. “The hope is that a new government after the federal elections in February will take steps to stimulate the economy, above all the beleaguered industrial sector, though that presumes a functioning two party coalition can be formed and take action, rather than just squabble like the traffic light coalition – it’s not out of the realms of possibility… but it could be very challenging,” said Marc Ostwald, chief economist & global strategist at ADM Investor Services. “In relative value terms, the DAX is on a P/E ratio of 15.7, as against 25.2 for the S & P 500, so it looks relatively cheap, though many would argue that it is cheap for a reason, though I would say fairly valued given the above mentioned problems,” Ostwald said. The stocks doing as poorly as the economy The German stock market as a whole isn’t booming. The mid cap and small cap stocks appear to reflect the GDP performance more closely than their large cap peers. The MDAX index was down by an annual 5.71% in 2024 while the SDAX lost 1.78% last year, according to FactSet data. “Reasons for this and the increased risk aversion towards [small and mid caps] were Trump’s election victory, subdued public spending, political uncertainty after the government coalition in Germany broke down, lack of impulses from abroad, and the worsening of the German economy, particularly in the automotive sector and the construction industry,” said Stephan Bauer, equity analyst at Metzler, in a Jan. 20 note. Nevertheless, Bauer, suggests the smaller stocks are likely to bounce in 2025.
