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A handful of companies dubbed Germany’s answer to the US “magnificent seven” have driven a strong rally in the country’s stock market this year, defying the gloom enveloping the domestic economy.
Frankfurt’s Dax, an index of 40 blue-chips, has risen 18.7 per cent this year, beating the benchmarks in France and the UK, and far outstripping the region-wide Stoxx Europe 600 index’s 4.8 per cent gain.
The performance comes in spite of weak domestic growth and political turmoil, with Germany’s unpopular coalition government collapsing in November after the parties were unable to reach an agreement over reforms to a fiscal “debt brake”, and the country now heading for a snap election in February.
Meanwhile, the economy is expected to expand by just 0.6 per cent in 2025, down from 1.2 per cent predicted midway through the year, according to economists polled by Consensus Economics. This marks the largest reduction in forecast growth over the period of any major industrial economy.
The Dax’s performance “has been a surprise”, said Timothy Lewis, a portfolio manager at JPMorgan Asset Management, and “serves as a great example of the adage that stock market and economic performance are not one and the same”.
Dax constituents derive less than a quarter of their earnings from within Germany, which has helped provide a buffer against tremors that have, for instance, seen automotive giant Volkswagen set out plans to lay off tens of thousands of workers and shutter several factories.
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This year’s bumper stock market returns have largely been driven by seven companies: software giant SAP, defence stock Rheinmetall, industrial conglomerate Siemens, Siemens Energy, Deutsche Telekom, and insurers Allianz and Munich Re.
SAP alone accounts for nearly 40 per cent of the Dax’s gains, with its shares up more than 70 per cent on the back of its transitioning of business customers to the cloud. It makes up a greater proportion of the index than the auto sector, including Volkswagen and Mercedes-Benz, both of which are in the red this year.
SAP has benefited from the market’s huge appetite this year for stocks with exposure to artificial intelligence. To that end, it has moved its earnings publication times from European mornings to after the US market close, to give it more exposure to North American investors and analysts. In October it replaced Dutch semiconductor equipment manufacturer ASML as Europe’s largest technology company.
“Technology stocks have been the story of this year and unfortunately in Europe we only have two major players: ASML and SAP,” said Marc Halperin, co-head of European equities at asset manager Edmond de Rothschild. “The icing on the cake is AI.”
The seven companies that have powered gains in the Dax have benefited from a variety of tailwinds, with defence company Rheinmetall climbing 107 per cent this year on the back of rising expectations of more defence spending in Europe, while Siemens Energy has gained 329 per cent due to growing demand for renewable power.
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Guillaume Jaisson, a macro strategist at Goldman Sachs, said the market was telling “two different stories”, with the market leaders — which he compared to Wall Street’s magnificent seven technology stocks — powering ahead of a swath of exporters vulnerable to a weak Chinese consumer and potential US tariffs.
A weaker euro has also boosted Germany’s export-focused market, with the dollar climbing from €1.11 to €1.04 since the end of September.
Some investors and analysts are concerned about the benchmark’s growing dependence on a small number of stocks.
“It risks an unstable market,” said Arne Rautenberg, a portfolio manager at Union Investment, who believes the market is vulnerable to an earnings shock from SAP.
The election of a new government and potential changes to Germany’s debt brake, US president-elect Donald Trump’s plans for trade tariffs, or China’s stimulus for its domestic economy could “change things very quickly” for the market, he added.
Halperin added that he had recently moved to a position on SAP that was smaller than the benchmark as earnings expectations started to climb to the lofty heights of US peers.
The narrowness of the Dax rally has become more acute in recent years, with the trend taking hold in the wake of the pandemic and mirroring the US where there are fears about the role of a few large technology companies in driving returns on the back of AI demand.
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Chipmaking giant Nvidia for example accounts for nearly a quarter of the benchmark S&P 500’s gains this year.
But many fund managers remain bullish on the prospects for German stocks trading at wide discounts to their US counterparts and deriving a significant portion of their revenues from outside their local market.
Marc Schartz, a portfolio manager at Janus Henderson, said the Dax’s concentration was “pretty extreme” but spread across energy, telecoms and insurance, unlike the US, which is solely concentrated in technology stocks. “Having a more diverse set of companies driving the markets isn’t a bad thing,” he said.
“The businesses we invest in are all pan-European. It’s just by chance that they’re listed in a certain postcode,” Schartz added.
Additional reporting by Ray Douglas in London