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Investment insights from Capital Group

While tariff turbulence has been roiling global markets, German equities have shone as a bright spot. Europe’s largest economy has defied pessimistic outlooks and may be mounting a comeback after years of lagging the U.S.

German stocks closely correlated to manufacturing

Sources: FactSet, Hamburg Commercial Bank (HCOB), S&P Global. Data from June 1, 2007, to May 8, 2025. The DAX Index rolling one-year total return is as of May 8, 2025. German manufacturing purchasers managing index (PMI) as of April 30, 2025. 

With the European Union focused on economic revitalization and concerns mounting over hyperconcentration in the S&P 500, the German DAX Index has surged 19% year-to-date (as of May 16) and is near its record high. A key gauge of the German economy, the manufacturing purchasers managing index, displayed an advance in its latest data, a preliminary sign the heavyweight in global manufacturing has moved past the malaise of recent years. As the chart shows, German equities have closely followed manufacturing levels. Meanwhile, the Ifo Business Climate Index for Germany has steadily risen this year.

Investors still place a premium on U.S. assets, hence, price-to-earnings multiples for German equities continue to lag the S&P 500, but there’s room for German stocks to rerate higher if trade stabilizes and Germany executes its policy transformation.

A global rotation into non-U.S. stocks may also benefit Germany, partly aided by an improving domestic economy. Led by Chancellor Friedrich Merz, a national plan to unleash billions in fiscal spending is an improvement in policy, buoying growth prospects across sectors, including defense and infrastructure. Separately, the European Central Bank has been more aggressive in reducing interest rates than the Federal Reserve.

Sector composition within the German equity market has also evolved over the past decade. Industrials, financials and technology are among industries weighted more heavily than their historical levels. At the same time, Germany’s once mighty carmakers are less dominant, following China’s meteoric rise in the global automotive industry. The auto group, which includes the likes of BMW and Mercedes-Benz, is primarily represented in the consumer discretionary sector. Weightings of auto companies in the DAX have fallen from roughly 16% 10 years ago to about 6% as of May 15.

With tariffs continuing to be rescinded or reduced and concerns around deindustrialization subsiding, long-term economic change may be afoot. While the country still faces headwinds from its reliance on Chinese exports, Germany is sending more concrete signals, both domestically and to international investors on carving a better path ahead.