German stocks under pressure amid multiple headwinds
Germany’s stock market, along with broader European indices, is under pressure due to the confluence of geopolitical instability, economic uncertainty, and policy ambiguity.
Down by over 3% from its early June high at 24,479, the German stock index – the DAX 40 – is on track for its fourth consecutive day of declines despite US markets holding up relatively well.
Apart from possible investor fatigue regarding buying German stocks at these elevated levels, there are several other factors which likely contribute to the indices’ recent relative underperformance.
Geopolitical tensions drive safe-haven flows
The growing threat of a direct conflict between Israel and Iran – and possible US involvement – has spooked global investors. Israel has signalled its preparedness to carry out a military operation against Iran, according to briefings with US officials.
In response, the United States has raised its travel alert to Level 4 for Iraq and begun evacuating non-essential diplomatic staff from various countries in the Middle East. The situation reflects a serious deterioration in regional stability. Iran, for its part, has reportedly vowed immediate missile retaliation should an Israeli strike occur.
The US is also bracing for potential retaliatory actions targeting its military and diplomatic assets, particularly in Iraq. As a result, capital is fleeing riskier assets like equities and rotating into safe-haven assets such as gold and government bonds.
Germany’s DAX index, composed heavily of export-oriented and cyclical firms, is particularly sensitive to global risk sentiment. The index’s concentration in industrial and automotive companies makes it especially vulnerable when investors seek defensive positioning during periods of geopolitical uncertainty.
Trade tensions threaten German export economy
President Trump’s renewed tariff threats – not only targeting China but also other trading partners – raise alarm bells for Germany, which is the world’s third-largest exporter. The US President announced plans to send letters to key trading partners within the next one to two weeks, setting out unilateral tariff rates.
However, Treasury Secretary Scott Bessent suggested the administration may extend the current 90-day pause on reciprocal tariffs for countries demonstrating “good faith” in negotiations.
German manufacturers are especially vulnerable to disruptions in global trade flows and supply chains, which is why the German DAX 40 index is hit harder than some of its European peers.
The threat of trade wars poses an existential challenge to Germany’s economic model, which relies heavily on manufactured exports to global markets. Any significant disruption to these trade flows could have severe consequences for German corporate earnings and economic growth.
Weak market catalysts and economic uncertainty
Although a US-China trade framework has been announced, its lack of detail and China’s pending approval mean it has failed to reassure markets. Without a concrete resolution, the deal provides little support for investor sentiment – especially for Europe, which benefits from stable trade dynamics between the two superpowers.
While US inflation came in slightly below expectations, the outlook remains clouded by inflation risks tied to tariffs and uncertain monetary policy. This ambiguity on the Fed’s next moves reverberates globally, impacting rate expectations and market liquidity.
German industrials, automakers, and tech firms – all DAX heavyweights – are highly exposed to both geopolitical and trade headwinds. The lack of demand visibility amid these mounting risks has triggered renewed fears of downward earnings revisions.
The interconnected nature of global supply chains means that uncertainty in one major market quickly transmits to others, with Germany’s export-focused economy particularly vulnerable to these cross-border spillover effects.
Valuation concerns prompt sector rotation
As of June 12, 2025, the German stock market, represented by the DAX index, has experienced a notable increase in its price-to-earnings (P/E) ratio compared to the beginning of the year.
The trailing P/E ratio stands at 18.67, which is above the 5-year average range of 12.10 to 15.67, indicating that the market is currently considered “expensive” relative to historical norms.
This compares to a trailing P/E ratio of 15.04 on January 1, 2025 for the DAX index, with a forward P/E ratio of 12.99, suggesting that valuations have risen considerably over the past six months.
The sharp increase in the P/E ratio indicates that investors are willing to pay more for each unit of earnings, often reflecting expectations of future earnings growth. However, such elevated valuations can also signal potential overvaluation, especially if earnings do not meet expectations.
Capital flows reverse toward US markets
Some large US institutional investors are cashing in some of their profits in German stocks and re-investing their gains in their domestic market, helped further by a weak US dollar, making those purchases cheaper for investors who sell stocks in euro. The rotation out of expensive US stocks, especially ‘Magnificent Seven’ stocks into German stocks is probably, at least partially, being reversed.
This rotation pattern suggests that the earlier European rally may have been driven more by relative valuation considerations than fundamental improvements in German economic prospects.
The reversal of these capital flows creates additional selling pressure on German equities at a time when domestic and international headwinds are already weighing on market sentiment.
DAX 40 technical analysis
The DAX 40’s recent slip hasn’t come as a surprise to technical analysts as negative divergence on the daily Relative Strength Index (RSI) increased the odds for a correction to be seen. It occurs when the underlying asset, in this case the DAX 40, makes new highs but the oscillator, the RSI, is making lower highs, thus not confirming the uptrend and instead showing negative divergence.
