DAX vs. S&P 500 Showdown - Which Rally Has More Fuel?

The German DAX has recently hit a new record high, while the S&P 500 is still recovering from the impact of trade tariffs, but does the DAX have further room for growth, or is the American 'catch-up' a more attractive opportunity?

Europe: The Growth Powerhouse?

The premier index of on Monday as the new Chancellor Friedrich Merz put his mark on the economy while investors were fretting over the implications of the US losing its top credit rating. This event was the latest in a trend this year where European and particularly German stocks have outperformed their American counterparts, attracting a significant capital inflow from across the Atlantic. ECB President Christine Lagarde said last week that due to uncertainty surrounding tariffs and other issues, such as the rule of law.

However, the explanation is somewhat more complex. As a result of the US stepping back from its role in European defence, EU leaders, particularly the German government, have pledged to step up spending. Naturally, this attracts investors, but a. Since the lion's share of new spending in the EU is directed towards defence, defence companies have been driving the market forward. Rheinmetall has gained almost 190% this year, with other major gains coming from Siemens and Heidelberg Materials at over 50% each, both related to infrastructure. Further support for stocks has come from the ECB's aggressive rate cuts this year in an effort to stave off deflation in an economy, after growth expectations were reduced due to the trade war.

The American Rebound?

Economic growth in the, but it is forecast to double that of the Euro Area at 1.9% during 2025. This makes the bets on European growth somewhat counterintuitive. Returning to the DAX, it has gained over 20% so far this year, but only that level (fewer than the number that are negative). This suggests that the German index has a narrow growth profile, relying on expected government policy more than fundamental growth. On the other hand, fiscal and monetary stimulus would increase if the global economy enters a soft patch, which could further support the German companies driving the index higher.

Meanwhile, by a combination of policy uncertainty, higher yields as Congress debates spending, and the Fed's inaction, waiting to see what impact tariffs have on inflation. A first quarter of negative GDP growth was offset by generally upbeat corporate earnings, which helped the benchmark rise through the course of earnings season. If trade deals start getting signed and the Fed finally eases monetary policy, then the S&P 500 has a chance of running to catch up with the DAX. However, this is not dependent on predictable fundamental economic factors.

DAX Test with 24K as S&P 500 Risks Pullback

The DAX trades above its prior record high of 23500, potentially heading towards the 25K level after recently testing the 24K mark. Meanwhile, the S&P 500, currently shy of the 6000 handle, faces the risk of a pullback towards 5800, with its first major hurdle to the upside being the record peak of 6150. On the one hand, upward momentum in the DAX appears stronger, fuelled by defence and infrastructure spending. On the other hand, its narrow growth profile introduces a risk of overextension.

Source: SpreadEX /Germany 40 vs. SPX 500

Key Takeaways

The DAX has outperformed its American counterpart so far this year due to increased defence and infrastructure spending in Europe. However, the narrow growth profile of Germany’s index raises questions about the sustainability of the trend, while on the other hand, a potential rebound in the S&P 500 hinges on trade deals and Fed policy easing. Although both indices face challenges while the DAX leads the rally, the S&P 500 has more catching up to do.