The German tiger reawakens, ushering in a new financial and economic era

US and German equities, 1953–present (base of 100 in 1953)

Over the long term, German equities have no reason to envy those of the world’s largest economy. The DAX 40 and the S&P 500 have delivered (nearly) equal returns – an average of 9% per year – for the past 70 years.

While their destination is almost the same, they’ve, at times, taken very different paths to get there.

Between 1950 and 1970, German equities outstripped their US counterparts owing to the Wirtschaftswunder¹ and the fiscal support of the Marshall Plan (equal to €100–200 billion in today’s euro value). By the same token, the DAX sharply outperformed the S&P 500 in the aftermath of Germany’s reunification, the implementation of the Solidarpakt² (equal to €120–140 billion in today’s euro terms), and the subsequent ten years of former East Germany’s economic integration. US equities, on the other hand, mainly outperformed in the period between the 1973 oil crisis and the peak of the dot-com bubble in 2000 and between the depths of the 2008 financial crisis and the S&P 500’s all-time high in 2024. The superior returns in both these periods were primarily driven by the United States’ technological dominance.

Over the past three years, however, US and German equities have performed equally well, which surely comes as a surprise to some. Investors are keenly aware of the boost that the Magnificent Seven have given to the US stock market, but perhaps less so of the many gems that the German market has harboured over the same period. In today’s challenging economic climate, where manufacturers are forced to cope with extremely high commodities prices, technology (SAP) is one stand-out sector, but it is also the case for financials in the broader sense (insurance companies in particular, notably Allianz and Munich Re). In the energy sector, Siemens Energy has fared particularly well. Some manufacturers (Rheinmetall) have been able to overcome their energy disadvantage and see their stocks outperform those of most US tech heavyweights.

The positive narrative from German equities could very well continue or even increase in the coming years. The government’s major spending programme for defence and infrastructure³ – of a magnitude exceeding the Marshall Plan – could put Germany back on track to long-forgotten growth rates, while concerns about the end of American exceptionalism might direct investment away from the US and towards the rest of the world. This shift in the flow of international capital should enable German and European equities to reach higher valuations, corroborating all the arguments in their favour.