DAX Surges to New Heights Amid US-China Trade Optimism—But Risks Linger

The DAX, Germany’s flagship stock index, has been on a remarkable tear in early 2025, with its latest record high reaching 23,767 points on May 12—a 0.7% jump from the previous close—capping a historic run fueled by optimism over thawing U.S.-China trade tensions. While the deal announced in Geneva has yet to deliver concrete tariff reductions, the mere prospect of de-escalation has injected momentum into European equities. Yet beneath the euphoria lies a fragile foundation: unresolved trade barriers, inflation risks, and the lack of a finalized agreement. Investors must weigh these factors carefully as markets balance hope against reality.

The Catalyst: Trade Talks and the “Deal”

The U.S.-China trade talks in Geneva marked a procedural shift rather than a substantive breakthrough. Both sides agreed to establish a formal consultation mechanism led by senior officials, including Chinese Vice Premier He Lifeng and U.S. Trade Representative Jamieson Greer. While this framework aims to institutionalize dialogue, no specifics on tariffs or deficit reduction were disclosed. U.S. tariffs on Chinese goods remain at 145%, with Beijing retaliating at 125%—levels analysts warn could stifle global supply chains.

The market’s reaction, however, prioritized hope over detail. The DAX’s 18% year-to-date gain outpaces the S&P 500’s 12% rise, reflecting investors’ bet on a resolution to the trade war. This optimism is amplified by $4.2 billion flowing into European equity funds in the week before May 7, as strategists at Bank of America advocate for international over U.S. markets.

Underlying Strengths: Germany’s Economy and Corporate Earnings

Beyond trade, Germany’s robust fundamentals are propelling the DAX. Commerzbank’s record quarterly profit of €834 million—up 12% year-on-year—epitomizes the resilience of European corporate earnings. Fiscal reforms by the new government, including tax incentives for green energy and tech sectors, are further boosting investor confidence.

The DAX’s 14x price-to-earnings (P/E) ratio, while slightly above its 20-year average, remains a relative bargain compared to the S&P 500’s 21x P/E, attracting value-seeking investors.

Central Banks: A Tailwind or a Threat?

Accommodative monetary policies are another pillar of the rally. The Federal Reserve’s hint at a potential June rate cut and the European Central Bank’s dovish stance have eased liquidity concerns. However, risks persist: Fed Vice Chair Michael Barr warned that tariffs could push inflation higher, a threat already materializing in supply chain bottlenecks.

The Cloud on the Horizon: Risks and Uncertainties

1. Trade Deal Fragility: The absence of concrete terms means tariffs could remain elevated indefinitely. Even if reduced, the 50% threshold analysts cite as critical for normal trade may not be met.
2. Geopolitical Volatility: President Trump’s volatile rhetoric—such as his Truth Social post suggesting lowering tariffs to 80%—adds uncertainty. China’s continued bans on U.S. beef and gas exports highlight unresolved non-tariff barriers.
3. Economic Slowdown Risks: While the DAX’s gains reflect optimism, U.S. ports reported a 21% year-on-year drop in Chinese imports, signaling a slowdown. Europe’s reliance on Chinese manufacturing inputs could amplify disruptions.

Conclusion: A Delicate Balance Between Hope and Reality

The DAX’s record highs reflect investors’ faith in a U.S.-China detente, supported by strong German earnings and central bank largesse. Yet the lack of actionable terms in the “deal” and persistent inflation risks mean this rally could unravel without tangible progress.

Investors should heed the following data points:
- The DAX’s 14x P/E offers value but demands patience for fundamentals to catch up.
- A 23,578.40 high in March 2025 serves as a key resistance level; a breach could signal a new era of confidence.
- The $1.2 trillion U.S.-China trade deficit remains unresolved, a reminder that the “deal” is still a work in progress.

In the coming months, the DAX’s trajectory will hinge on whether the Geneva framework evolves into concrete tariff reductions or merely becomes a venue for rhetoric. For now, the index’s ascent is a testament to hope—but investors must remain vigilant.