Recent German economic data continue to point to persistent weakness in the German economy. The services Purchasing Managers’ Index (PMI) recorded a reading of 52.7, slightly above expectations of 52.6 but lower than the previous reading of 53.1. Meanwhile, Germany’s headline consumer price index slowed on a year-on-year basis to 1.8%, coming in below market expectations of 2.0% and down from the prior reading of 2.3%. In addition, German retail sales declined by 0.6% on a monthly basis, a sharper contraction than expected (-0.2%), following a previous increase of 0.3%.
Despite the ongoing economic slowdown and the negative pressures weighing on domestic activity, German equities are moving in the opposite direction. The DAX index continues its upward trajectory, reaching 25,122 points yesterday, its highest level on record. The index gained around 23% over the past year and is up approximately 2% year to date, outperforming most other European equity benchmarks, including France’s CAC 40, the UK’s FTSE 100, and the STOXX 600. This divergence represents a surprising contrast to the underlying economic backdrop.
Several factors are providing positive momentum for German equities. Chief among them is the strong performance of certain sectors, particularly defense. shares rose by around 154% last year and are up roughly 16% since the start of the year. The banking sector has also Rheinmetall received support amid growing optimism over a sizeable fiscal stimulus package from the German government. In addition, German government bond yields across maturities have declined for a third consecutive session, enhancing the relative attractiveness of equities compared to fixed-income instruments.
Looking ahead, forecasts point to the DAX potentially reaching 26,350 points by the end of 2026, implying an annual upside of around 8%, according to a Bloomberg survey.
From a technical perspective, indicators continue to support the upward trend in the DAX. The index has recently seen a bullish “golden cross” between the 20-day and 50-day moving averages, a technical signal that suggests further upside potential. The Relative Strength Index is currently near 75, indicating strong positive momentum, albeit within overbought territory, which calls for caution regarding the risk of short-term corrections.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
