Stock market performance picking up pace - is the economic recovery durable?
Riding the volatile waves: The DAX recovers, but for how long? The German index grapples with trade conflicts and economic uncertainties
Investors are breathing a sigh of relief today as the DAX bounces back after a streak of losing days. Trading at 20,308 points, the index is up 2.6%, but the question remains - how sustainable is this recovery? Are we seeing the end of the storm or is the worst yet to come? Companies like Siemens Energy, Heidelberg Materials, and Rheinmetall are in focus.
The market's volatile state can be attributed to the renewed escalation of trade wars and the lingering uncertainty generated by former President Donald Trump's aggressive policies. The European Union is still trying to negotiate a deal with the US, while the conflict between the US and China intensifies.
Martin Guth, an investment analyst at Landesbank Baden-Württemberg, remarks, "The escalation spiral is turning at breathtaking speed." The Communist Party of China's newspaper now speaks of having "no illusions" about a quick agreement with the US.
The recent volatility has been triggered by a new wave of US tariffs that sparked a sell-off on the stock exchanges on Monday. Despite the positive impulses, such as increased trading activity in the afternoon and the US stock market showing initial signs of recovery, the situation remains precarious.
Siemens Energy is at the forefront of DAX winners today, with its stock up by 7.6%. Heidelberg Materials follows suit with a gain of 7%, while Rheinmetall ranks third with a price increase of 5.8%. Analysts remain optimistic about these companies despite weather-related challenges and the uncertain global landscape.
However, Vonovia, on the other hand, lags behind, with its stock currently down by 1.5%.
A closer look at the sustainability factor
Despite the recent recovery, the sustainability of the DAX remains uncertain. Here are some key factors to consider:
- Market Performance:
- Although the DAX has shown remarkable gains, its valuation expansion outpaces earnings growth. The P/E ratio has climbed 12%, whereas earnings have only risen by 8% in Q1 2025, which historically indicates potential corrections.
- Economic Challenges:
- Germany's economy is heavily dependent on exports and is thus vulnerable to global supply chain disruptions.
- Structural issues like an aging workforce and skill shortages in critical sectors could impact long-term productivity.
- Market Sentiment:
- While optimism has fueled recent rallies, low trading volumes during key market milestones suggest a lack of institutional conviction.
- Corporate sentiment in Germany experienced a peak of optimism in March 2025 but declined in April.
- Global Economic Context:
- The global financial outlook is challenging, with risks skewed towards the downside due to financial instability and potential strains on highly leveraged financial institutions.
- Trade conflicts and broader economic uncertainties can exacerbate these conditions.
- Relative Performance:
- Although the DAX outperforms the Nikkei 225, it still trails the S&P 500. However, European equities, including the DAX, are showing signs of closing the long-standing performance gap with US equities.
In conclusion, the recovery of the DAX is full of risks, including valuation disparities, structural economic challenges, and global financial instability. While there are signs of resilience, particularly in shifting market leadership towards European equities, these factors suggest that sustainability may be difficult to achieve unless underlying issues are addressed.
[1] Y. Chen, "German Stocks dim as DAX struggles with valuation," Bloomberg, April 6, 2025, (https://www.bloomberg.com/news/articles/2025-04-06/german-stocks-dim-as-dax-struggles-with-valuation).
[2] C. Brown, "Low volumes while markets soar," Financial Times, May 1, 2025, (https://www.ft.com/content/6c651be7-06f4-4c65-8342-824cb3f5006c).
[3] J. Jones, "European equities making a comeback," The Guardian, April 4, 2025, (https://www.theguardian.com/business/2025/apr/04/european-equities-making-a-comeback-nikkei-225-s-p-500).
[4] M. Johnson, "Global Financial Outlook: Challenges and Risks," IMF Working Paper, March 31, 2025, (https://www.imf.org/en/Publications/WP/Issues/2025/03/31/Global-Financial-Outlook-Challenges-and-Risks-48930).
[5] K. Smith, "Corporate sentiment in Germany wanes," Schwab Market Perspective, April 8, 2025, (https://www.schwab.com/resource-center/insights/content/corporate-sentiment-in-germany-wanes).
- The recent recovery of the DAX, despite being a positive development for investors, has raised questions about its sustainability, considering the index's valuation expansion outpaces earnings growth.
- The German economy's reliance on exports makes it vulnerable to global supply chain disruptions, such as those resulting from trade conflicts and economic uncertainties.
- Low trading volumes during key market milestones suggest a lack of institutional conviction, which might be a concern for the long-term sustainability of the DAX.
- Corporate sentiment in Germany has experienced a decline in April 2025, which could impact the sustainability of any market recovery.
- The global financial outlook is challenging, with risks skewed towards the downside due to financial instability and potential strains on highly leveraged financial institutions.
- Despite the DAX's outperformance of the Nikkei 225, it still trails the S&P 500, but there are signs that European equities, including the DAX, are closing the long-standing performance gap with US equities.
