DAX outperforms the S&P 500 - what is behind the outperformance of German equities?

The DAX has pulled ahead of the S&P 500 since the beginning of October. The stock market world is amazed. Is this the long-awaited turning point for German equities? Is the stock market landscape on the verge of change, with Germany's underdog role finally coming to an end? Ali Masarwah, fund analyst and managing director of the financial services provider envestor, wonders.

David versus Goliath: the DAX is catching up.

16 December, 2024 FRANKFURT (envestor). Everyone is talking about the seemingly endless dominance of US equities, but an astonishing story has been circulating in recent months: The DAX overtook its big brother, the S&P 500, in the fourth quarter - regardless of the much-cited Trump trade. With an increase of 5.6 percent since the beginning of October, German blue chips have moved ahead of the leading US index, which gained 5.3 percent. The DAX has been particularly strong so far in December, rising by four percent, while the S&P has been treading water. The stock market world is rubbing its eyes in amazement at the “doom and gloom” mood for the German economy. As a reminder, the S&P 500 has outperformed the DAX by a whopping eight percentage points annually over the last 15 years. Is Schalke 04 now buying off Bayern Munich?

Because stock market players - like fund analysts - are great at finding the right explanation for stock market developments after the fact, here are two ideas: German companies are currently as cheaply valued as bargains on Rudi's leftover ramp. Because the companies being sold off include global market leaders, it is no wonder that investors are snapping them up. What's more, takeover activity is set to increase. US companies will benefit from deregulation on their home market and go on an international shopping spree. This fantasy is also driving the DAX.

Comeback of German shares - just a mirage?

As tempting as the idea that US equities are just running out of steam is, the above calculation is incomplete. The US supremacy is initially reflected not only in share prices, but also in the strength of the currency. For euro investors, the entire outperformance of the DAX is therefore only theoretical: thanks to the strong dollar, the S&P 500 was nevertheless ahead between the beginning of October and mid-December. And clearly so: 12% vs., well, 5.6% for the DAX, from the perspective of investors in Germany. 

Moreover, the comparison between the DAX and the S&P 500 ignores the real spectacle on the US market. The bull market is broadening there. The much-vaunted “Magnificent 7” are no longer the only stars of the show. The rotation towards second-line stocks is in full swing. And it's not just about the Magnificent 7 vs. the S&P 493, but also about the smaller US tech companies. The Nasdaq Emerging Cloud Index brings together the growth players from the second and third tiers. It has gained 27% since the beginning of October - a whopping 35% from the perspective of euro investors.

And what are German second-tier stocks doing? The SDAX and MDAX have been bobbing along (slightly) in the red so far this quarter.

Conclusion: the story remains the same

At the end of the day, US exceptionalism remains the same - it just has new figureheads. Instead of the big tech giants, it is now the small and medium-sized companies that are setting the tone. Although the short-term outperformance of the DAX is pleasing, it is unfortunately no reason to pop the champagne corks. Especially as it is debatable whether a sell-off of German assets is necessarily in the interests of the German economy. 

For investors, this means that the big picture remains unchanged and there is nothing to suggest that the “great US bubble” that is repeatedly conjured up will burst. The USA remains the largest, most liquid and most innovative market in the world, and in the wake of deregulation, the US economy is becoming more dynamic and the gap between it and Old Europe is widening. This does not rule out the possibility that investors will temporarily come to their senses and store cheaply in Europe. However, there are no signs of a secular change of favorites.