The capital spillover from the US to Europe is boosting the German stock index. The DAX 40 has been among the ten fastest-growing indices since the beginning of the year. Conversely, the S&P 500 index is performing below expectations. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The DAX 40 is one of the world’s top 10 stock indices.
- Capital flight from the US is helping German stocks gain ground.
- US stocks are overvalued.
- Long trades on the DAX 40 can be considered on a breakout of the resistance levels of 24,050 and 24,200.
Weekly DAX 40 Fundamental Forecast
While risks are rewarded in Europe, they are discouraged in the US. Investors in the US are on tenterhooks awaiting Donald Trump’s next social media posts. In the eurozone, inflation has been brought under control, political risks have been minimized, and the region’s willingness to move from fiscal restraint to profligacy is helping to boost stock indices. One of the leaders is the German DAX 40. Since the beginning of the year, it has grown by more than 30% in US dollar terms and is ranked among the world’s top ten stock indices. By comparison, the S&P 500 index ranks 73rd out of 92.
US and EU Stock Indices
Source: Bloomberg.
At the end of 2024, the outlook for the DAX 40 was bearish. The prevailing opinion in the market was that Germany, with exports accounting for more than 40% of its GDP, would suffer much more from trade wars than the US. The impeachment of Olaf Scholz and the subsequent snap parliamentary elections were seen as a high political risk. At the time, the loss of American exceptionalism and Berlin’s adjustment of the fiscal brake were not considered.
The US administration’s protectionist policy has prompted a re-evaluation of the significantly undervalued European stock markets. According to Citi, the eurozone is in a relatively strong position. The ECB has room to lower rates, and securities are not as expensive as in the US. While a looming recession in the US will undoubtedly deal a severe blow to the global economy, the prolonged period of stagnation in Europe has rendered this region particularly appealing to investors.
Corporate earnings estimates in the US are falling. In January, the figure stood at 10%, in March at 8.4%, and in June at 4%. In contrast, the European figure rose by 5.3% in the first quarter, exceeding the forecast of a 1.5% decline.
EU Corporate Earnings Outlook
Source: Bloomberg.
US stocks continue to appear overvalued. The P/E ratio of the Magnificent Seven stocks is 27, while for the remaining 493 of the S&P 500 components, it is 19, with an average of 16.5 over the past 25 years. This is one of the reasons why UBS forecasts a capital outflow from the US to Europe of $1.4 trillion over the next five years. In fact, the scale may be even greater.
Since the global economic crisis of 2008, the net international investment position of the US has increased to -$26 trillion. In other words, in less than 17 years, non-residents have purchased far more US stocks and bonds than US residents have purchased European, Japanese, and other foreign securities.
Weekly DAX 40 Trading Plan
The transparency of German policy, the emphasis on fiscal stimulus, the continuation of the ECB’s monetary expansion cycle, affordable stocks, and capital flows from the US to Europe are setting the stage for a rally in the DAX 40 index. A breakout above the resistance levels of 24,050 and 24,200 will offer an opportunity to open long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of FDAX in real time mode
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