DAX's Winning Streak Amid Fiscal Stimulus and Volatility

The German DAX index has extended its winning streak to seven consecutive sessions as of April 30, 2025, closing at 22,496.98 points—a 0.32% rise from the previous day. This marks a recovery from earlier dips tied to U.S. tariff policies and sets the stage for a critical balancing act between bullish fiscal stimulus and lingering macroeconomic risks. While the Frankfurt Stock Exchange was closed on May 1 for Labour Day, the DAX’s trajectory underscores a market caught between optimism and uncertainty.

Fiscal Stimulus Fuels the Rally

The DAX’s gains are largely attributed to Germany’s aggressive fiscal stimulus, spearheaded by Chancellor Friedrich Merz’s €500bn infrastructure plan and relaxed fiscal rules for defense spending. These policies, dubbed the “Marshall Plan for Germany,” have galvanized investor confidence. The ZEW business expectations indicator hit its highest level since February 2022, reflecting optimism about economic growth. The stimulus has particularly buoyed sectors like construction and industrials, with companies such as Siemens and ThyssenKrupp benefiting from infrastructure spending.

ECB’s Support vs. Recession Risks

The European Central Bank (ECB) has amplified this optimism by cutting rates twice in early 2025 and signaling further easing. Markets now price in an additional 60 basis points of rate cuts by year-end, lowering borrowing costs for corporations and governments. However, Germany’s domestic economy remains fragile. The Ifo business climate index fell to 85.7 in November 2024, its fifth consecutive monthly decline, while GDP is projected to contract by 0.2% in 2024. A services sector PMI of 49.4 in late 2024—just below contraction—adds to concerns of a technical recession.

U.S. Tariffs and Global Trade Tensions

Despite fiscal optimism, the DAX faces headwinds from U.S. trade policies. New tariffs on steel, aluminum, and autos have pressured German exporters like Volkswagen and BMW, which account for 10% of Germany’s U.S. exports. While a March executive order softened automotive tariffs, ongoing uncertainty around further measures has kept volatility elevated. Meanwhile, China’s manufacturing PMI dropped to a near two-year low of 49.0 in April, squeezing German exporters reliant on Asian supply chains.

Capital Flows and Valuation Appeals

Investors are betting on the DAX’s valuation edge. Trading at 16x earnings—far below the S&P 500’s 25x—European equities have attracted capital fleeing U.S. markets. Bank of America notes investors are divesting from U.S. stocks at a record pace, with exposure to the region deviating 23% from historical norms. This capital reallocation has driven the DAX’s 12.89% year-to-date gain as of April 30, outperforming the S&P 500’s modest 3% rise.

Technical and Sentiment Risks

Technical indicators suggest caution. The DAX’s RSI divergence—where price highs fail to match RSI momentum—hints at near-term corrections. Meanwhile, DAX options data reveals investors are hedging downside risks, with put/call ratios spiking to 3.24 in March. Analysts warn that weak U.S. data, such as a potential contraction in the ISM Manufacturing PMI to 48.0 in May, could test the index’s resilience.

Conclusion: A Delicate Balance

The DAX’s winning streak reflects a market divided between fiscal optimism and structural risks. While Merz’s stimulus and ECB support have propelled gains, U.S. tariffs, a potential German recession, and geopolitical uncertainties loom large. The index’s year-to-date performance—2,566 points higher—and proximity to its March 2025 all-time high of 23,578.40 highlight investor confidence in its recovery from pandemic lows (9,935.84 points in March 2020).

However, analysts caution that the DAX’s projected end-of-year close of 20,431.91 points hinges on resolving trade conflicts and avoiding a synchronized global slowdown. Investors should monitor May’s U.S. economic data, including the ISM Manufacturing PMI and GDPNow estimates, for clues on whether this rally can sustain. For now, the DAX remains a barometer of Europe’s ability to navigate fiscal stimulus, trade wars, and the ghosts of recession—all while dancing on a tightrope of hope and caution.