Bayer AG and DAX Resilience: Navigating Turnarounds and Geopolitical Winds

Rhys NorthwoodThursday, Jun 19, 2025 12:52 pm ET
3min read

The European equity landscape in 2025 is a study in contrasts: while geopolitical tensions and legal overhangs loom large, select industries are proving remarkably resilient. At the heart of this duality lies Bayer AG, whose stock has surged amid hopes of legal clarity, and the DAX index, buoyed by defense sector outperformance. For investors, this presents a compelling opportunity to capitalize on catalyst-driven turnarounds and macro tailwinds in German industrials and healthcare.

Ask Aime: Capitalizing on DAX's resilience amidst legal and geopolitical challenges. How to invest in Bayer AG and German industrials? Guide for retail investors.

Bayer AG: Litigation Overhang or Catalyst for Rebound?

Bayer's stock has climbed 40% year-to-date in 2025, reflecting optimism around its pending U.S. Supreme Court ruling in the Durnell v. Monsanto case. The decision, expected by late 2025, could resolve a decade-long legal battle over Roundup's glyphosate liability. If the Court rules in favor of federal preemption—arguing EPA approval preempts state failure-to-warn claims—Bayer's $8 billion in remaining litigation costs could evaporate. Analysts at Goldman Sachs estimate this outcome could unlock a 25% upside to €33, as shares trade at just 6x forward P/E, far below peers.

Ask Aime: Can Bayer's stock continue to rally after the Supreme Court ruling?

Even without a Supreme Court win, Bayer's operational turnaround under CEO Bill Anderson is a stabilizing force. Cost cuts, streamlined operations, and growth in its pharmaceutical pipeline (e.g., Nubeqa, Kerendia) have boosted EBITDA by 12.4% in Q1 2025. The experimental stroke drug Asundexian, with a late-2025 trial readout, could add €2–3 billion in annual sales, further insulating the company from litigation headwinds.

DAX Resilience: Defense as the New Safe Haven

While Bayer's story hinges on legal clarity, the broader DAX has found support in defense sector outperformance. Geopolitical tensions and EU defense spending initiatives are driving record profits for companies like Rheinmetall, Airbus Defense, and Hensoldt. The EU's €800 billion defense plan and Germany's €500 billion infrastructure fund have created a fiscal tailwind, with Rheinmetall's stock surging 100% year-to-date on contracts for armored vehicles and radar systems.

Hensoldt exemplifies this shift: its revenue growth target of 10% annually through 2030 is fueled by TRML-4D radar scaling and AI-driven optronic sensors. Meanwhile, Airbus Defense has secured €3.5 billion in contracts for military satellites, leveraging geopolitical demand. These companies are beneficiaries of a strategic pivot toward self-reliance, with the DAX's defense constituents outperforming the index by 15% in 2025.

Valuation and Risks: Balancing the Odds

Despite the optimism, risks remain. Bayer's debt pile (€34 billion) and ongoing PCB litigation from Monsanto's legacy could test its recovery. A negative Supreme Court ruling would force further settlements, potentially triggering a 10–15% share drop. Meanwhile, the defense sector's growth hinges on sustained geopolitical spending—a risk if tensions ease or budgets tighten.

Yet valuations argue for patience. The DAX trades at 13x P/E, below its 10-year average of 15x, while Bayer's 6x P/E reflects priced-in pessimism. For investors, the asymmetric payoff is clear: Bayer's upside if litigation resolves (€33 target) outweighs downside risks, while defense stocks offer inflation-resistant cash flows and geopolitical insulation.

Investment Thesis: Selective Longs in German Industrials/Healthcare

The case for selective long positions in Bayer and DAX defense stocks rests on three pillars:
1. Catalysts in Sight: The Supreme Court ruling and Asundexian trial (2025) are near-term inflection points for Bayer.
2. Valuation Discounts: Both sectors trade at multiyear lows, offering margin of safety.
3. Macro Tailwinds: Defense spending and European fiscal expansion are structural, not cyclical.

Portfolio Strategy:
- Overweight Bayer AG (BAYGN) at current levels, targeting €30–€33 by end-2025.
- Add DAX defense exposure via ETFs (e.g., XGD) or direct holdings in Rheinmetall (RHM) or Airbus (AIR).
- Hedge risk with options or defensive allocations in healthcare infrastructure plays.

Conclusion: Riding the Turnaround Wave

Bayer and the DAX's defense sector are exemplars of how European equities can thrive amid uncertainty. For investors willing to bet on legal resolution and geopolitical spending, these names offer asymmetric upside. The key is to focus on companies with clear catalysts—like Bayer's Supreme Court case—and sectors insulated from trade wars, like defense. In 2025, resilience is not just about survival; it's about capitalizing on the comeback.