From Stagnation to Selective Opportunity

After two bruising years marked by recession, energy shocks and fading export momentum, Germany enters 2026 with something it has lacked for a while: a credible path back to growth. It may not be a boom, but for Europe’s largest economy, even a modest acceleration carries outsized implications for the DAX 40 index.

The past two years were defined by economic fatigue. Output contracted in both 2023 and 2024, industrial capacity utilisation sank, and Germany’s export-led economy came under sustained pressure from high energy costs, weak global demand and intensifying competition from China. In 2025, growth barely lifted its head above zero, leaving the economy stuck in what could be described as “structural stagnation.”

Yet beneath the surface, the foundations for a cyclical recovery are being laid. A dramatic fiscal pivot, easing monetary conditions and improving domestic demand set the stage for 2026 to potentially mark a turning point, not a renaissance, but a re-rating.

Why 2026 Matters More Than 2025

Consensus expectations for German GDP growth in 2026 cluster between 0.7% and 1.6%, with several leading institutes now converging around the 1% handle. The German Council of Economic Experts forecasts growth of 0.9%, while institutes such as ifo, IfW and the Halle Institute for Economic Research see upside risks if fiscal spending accelerates and trade tensions stabilise.

Importantly, this growth is not expected to be organic. Roughly one-third of the expansion stems from calendar effects, as 2026 benefits from additional working days. Another meaningful share is driven by government spending from defence, infrastructure and climate-related investment funds. Private-sector momentum remains fragile but no longer collapsing, and that distinction matters for equity markets.

Fiscal Expansion Becomes a Structural Tailwind

Germany’s move away from fiscal orthodoxy is arguably the most important macro development for the DAX outlook. The easing of the debt brake, the creation of a €500 billion off-budget infrastructure and climate fund, and the expansion of defence spending have altered the medium-term earnings backdrop.

However, these measures will not transform the economy overnight. Bureaucracy, labour shortages and slow project execution remain binding constraints. But fiscal stimulus tends to have its strongest market impact not when it peaks, but when expectations turn, and that inflection appears to be approaching.

For German equities, this matters because it directly supports sectors with heavy index weightings, particularly Industrials and Financials. Defence contractors, engineering firms, construction suppliers and capital-goods manufacturers stand to benefit disproportionately from higher public investment, even if the initial multiplier effect is muted.

Tariffs, Trade and the Trump Variable

No discussion of Germany’s outlook in 2026 is complete without addressing tariffs, which have become a material headwind for the export drive country. The United States remains Germany’s single largest export destination and the German automotive sector has been hit hardest, with car exports to the United States falling by nearly 15% in the first three quarters of 2025. Under a revised trade agreement reached in August, the US imposed a 15% baseline tariff on European car imports. While this was lower than the initially threatened 25% rate, it has still significantly curtailed demand, marking a sharp reversal after several years of steady export growth.

The impact extends well beyond autos. Overall, German exports to the US declined by 7.8% over the past year, with machinery, chemicals and industrial components also under pressure. Machinery exports were particularly affected by steep US tariffs on steel and aluminium, while chemical exports fell by nearly 10%, reflecting a combination of trade barriers and weaker domestic production caused by high energy costs. With tariffs unlikely to be rolled back in the near term, Germany is accelerating its efforts to diversify trade relationships within Europe and markets such as India and Indonesia. Reducing reliance on the US is no longer a strategic aspiration, but an economic necessity.

The Problem of Stronger Euro

A firmer euro is emerging as a more immediate headwind. After appreciating sharply against the US dollar, the currency is now a drag on export competitiveness and a direct translation hit to earnings for globally exposed DAX constituents.

Large German corporates, with significant dollar-denominated revenues, no longer enjoy the FX tailwind that improved margins in previous years. This partly explains why earnings growth expectations for 2026, while improving, remain vulnerable to downward revision.

We anticipate the euro to break its key resistance of 1.1919 against the US dollar in the first quarter of 2026 and extend it rally towards 1.25 by the end of next year. A stronger euro could ease inflation pressures, and the net effect may be neutral to positive for domestically oriented firms and financials.

Inflation, Rates and the ECB

Inflation in Germany has stabilised close to the ECB’s 2% target, with headline rates expected to average around 2% in 2026. Core inflation remains stickier, but the direction of travel is no longer alarming policymakers.

This gives the ECB room to keep rates on hold or even deliver another cautious cut. A supportive rate environment is particularly constructive for equities that suffered during the tightening cycle, including banks, insurers and rate-sensitive cyclicals.

For the DAX, this matters less through valuation expansion as multiples are already reasonable and more through earnings durability. Lower rates reduce financing stress, stabilise credit demand and support balance sheets.

Which Sectors Are Likely to Drive the DAX in 2026

The DAX is not a tech index, and that remains both its weakness and its strength. Its largest sectors Industrials and Financials are precisely those most leveraged to fiscal spending, monetary easing and a cyclical stabilisation.

Industrials are poised to benefit from defence procurement, infrastructure upgrades, electrification and automation. While Germany may not lead the AI revolution, many DAX companies are quietly integrating automation and digital tools to drive efficiency, protect margins and improve productivity.

Financials, particularly banks, continue to look underappreciated. Earnings revisions have been positive, capital returns are strong, and valuations remain undemanding. Even modest loan growth combined with stable margins could support further upside.

Beyond these, pharmaceuticals and select healthcare names offer defensive growth, while autos and chemicals remain more challenging, weighed down by structural pressures and global competition.

Valuations: Not Cheap, Not Excessive

At roughly 17 times earnings, the DAX trades well below US equity multiples. While this represents a premium to its own historical average, the valuation gap reflects sector composition rather than exuberance.

From here, multiple expansion is unlikely to be the main driver of returns. Earnings will need to do the heavy lifting and that is where fiscal stimulus, easing rates and stabilising demand begin to matter.

Source: TradingView. Daily price chart of DAX 40 as of 7 January 2026.

Technical Perspective on the DAX 40

Technically, the DAX enters 2026 in consolidation rather than correction. The long-term uptrend from the October 2022 lows remains intact, despite the index trading sideways since June, after an exceptionally strong rally at the beginning of 2025.

The November low of 22,943 continues to act as a key support level and a decisive break above the key 24,771 resistance occurred in early January 2026. This breakout could open the door to fresh record highs, with the psychologically important 26,000 level coming into view.

A Market That Rewards Selectivity

The DAX in 2026 is unlikely to deliver a straight-line rally. Volatility is set to return, and macro risks from trade policy to currency strength remain very real. But the broader picture has improved.

Germany is moving from contraction to stabilisation, from fiscal restraint to stimulus, and from despair to cautious optimism. For equity investors, that transition matters more than headline growth numbers.

In a market long defined by pessimism, even modest improvement can be powerful. And for the DAX 40, 2026 looks less like a peak and more like a proving ground.

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