DAX Hits New All-Time High – But GDP Growth Lags

Global stocks have continued to outperform many economic metrics, the DAX is one the most spectacular in developed markets.

• German GDP has been frail for 2 years
• Earnings and industry outlook are weak
• DAX growth is twice as high as GDP

The DAX hit of to another all-time high this morning, spurred by increasing bets on ECB cuts. The market is banking on monetary easing policy to spur growth in 2025. The DAX has gained 1.7% so far this week and is up 0.65% so far this morning.

GDP and DAX Growth Disconnect

The German GDP has placed a growth of 1,964% since December 1970 through December 2023. Over the same period the DAX has posted a 2,586% growth, with the current market showing a growth of 3,279% from December 1970 to January 2024.

The chart above shows the German GDP (crimson line) against DAX (green line) growth rates from 1970 to 2023 for the GDP and to 2024 for the DAX.

What is immediately apparent is that the DAX has outperformed GDP for a longer period and by far more a percentage than in any previous period.

The chart doesn’t show the GDP growth for 2024, but we do know that it has been flat to negative depending on which period you look at.

The last year of DAX price growth has sent the index to levels not seen before. Clearly there is a disconnect between the recent performance of the economy and investor confidence.

Risks Ahead for the DAX

The stock markets face a series of risks as we enter into 2025, and it seems that the only factor that may stop a decline in economic activity is ECB policy.

However, cut rates in the Eurozone will also lead to a weakening EUR/USD, and that will be exacerbated by a strong US economy and slower cuts from the FED.

I can see the euro falling below par with the dollar, which would create imported inflation and squeeze the ECB into a tight corner.

Then the trade tariffs promised by Trump are highly likely and may hurt exporters, which may be offset by a weaker euro.

Germany also has an energy problem, and although many parties are looking to reign in the most aggressive sustainability policies, it’s doubtful anything meaningful will change.

Overall, the DAX is extremely overvalued, and it seems the euphoria driven from ECB policy may hit the hard reality at some point.

DAX Live Chart

DAX

Gino D’Alessio is a professional Forex trader with 20+ years of experience in the financial markets as a broker-dealer. Having worked in New York and London, Gino is regularly featured on Seeking Alpha. He completed the CAIA program in 2015, which also gave great insight into global macro factors. His main focus is FX majors, indices and commodities.