German Equities Surge on Earnings and Fiscal Stimulus Amid Trade Policy Shifts

The German DAX index (DE40) has embarked on a remarkable ascent in early 2025, climbing 12.89% year-to-date by late April and reaching an all-time high of 23,578.40. This surge, fueled by robust corporate earnings, fiscal stimulus, and easing U.S. trade tensions, has positioned German equities as a standout performer globally. Yet beneath the surface, divergent trends among sectors and companies underscore both opportunities and risks for investors.

Corporate Earnings Drive the Rally

The DAX’s gains are anchored in strong first-quarter results from key constituents:

• Deutsche Bank led the charge, reporting a 39% year-on-year jump in net profit to €1.78 billion. Cost-cutting and resilient trading revenues propelled its stock up 3.1%.
• Adidas delivered a 155% leap in net income to €428 million, driven by demand for its sportswear. However, lingering uncertainty over U.S. tariffs on imported goods prompted the company to withhold revised 2025 forecasts, tempering its gains.
• Rheinmetall and Symrise also shone, with defense spending and beauty-care demand boosting their shares 6% and 4%, respectively.
• HelloFresh surged over 10% as operational improvements pushed adjusted EBITDA to €58.1 million, nearly tripling its 2024 figure.

Yet not all companies thrived. Porsche AG saw its stock plunge 7.6% after downgrading 2025 revenue and profit targets, citing tariff-related headwinds. Similarly, Lufthansa’s widening net loss to €885 million dragged its shares down 2.7%.

Macroeconomic Tailwinds and Crosscurrents

Two factors are amplifying investor optimism:

1. Fiscal Stimulus: Chancellor Friedrich Merz’s proposed €500 billion infrastructure and defense spending plan has injected confidence into sectors like construction and defense. The DAX’s 11.3% Q1 return ranked third globally, trailing only Chinese indices.
2. U.S. Trade Policy Shifts: The White House’s decision to reduce tariffs on U.S.-made automotive parts eased fears of a trade war, benefiting automakers and parts suppliers—even if some stocks, like Deutsche Boerse, fell due to broader sector pressures.

Meanwhile, German consumer morale hit an 8-month high in May, with the GfK index improving to -20.6. This resilience contrasts with persistent concerns over U.S. trade policies, which remain a wildcard for exporters.

Valuation and Risks

The DAX’s price-to-earnings (P/E) ratio has expanded to 22.2x as of late April 2025, far exceeding its three-year average of 16.0x. This premium reflects investor optimism despite annual earnings declines of 8.8% over three years.

Key risks remain:
- Tariff Volatility: Companies like Porsche and Adidas face headwinds from U.S. trade policies, which could disrupt earnings projections.
- Earnings Sustainability: While Q1 delivered record results, many firms have yet to commit to long-term growth targets, leaving room for disappointment.

Conclusion: A Resilient Rally, but Challenges Loom

The DAX’s 2025 surge underscores the power of fiscal stimulus and corporate resilience, even as global trade tensions simmer. With the index at record highs and investor confidence elevated, German equities appear attractive for those willing to bet on structural reforms and a U.S.-Europe trade détente.

Yet caution is warranted. The DAX’s elevated P/E suggests limited room for error, while companies like Porsche and Lufthansa highlight vulnerabilities to macroeconomic and geopolitical shocks.

Investors should balance exposure to fiscal stimulus beneficiaries (e.g., defense and infrastructure stocks) with cautious scrutiny of tariff-sensitive sectors. The path forward hinges on whether Germany’s policymakers can sustain the momentum—and whether U.S. trade policies stay on course.

As of April 2025, the DAX’s gains are undeniable, but the durability of this rally will depend on navigating the fine line between optimism and overvaluation.