The German stock exchange opened the new trading year on a cautiously optimistic note, with the DAX index registering a slight increase of 0.4 percent to approximately 24,595 points by 9:30 am. However, analysts caution that the initial gains mask underlying vulnerabilities and the year ahead presents considerable challenges for the benchmark index.
Thomas Altmann of QC Partners attributed the initial reaction to a weaker performance of US markets in the final days of 2024. The fact that the first trading day falls on a Friday is also expected to contribute to lower trading volumes before a return to normalcy next week.
A key concern weighing on the DAX’s prospects is its elevated price-to-earnings (P/E) ratio. While corporate profits reached record highs last year, stock prices have outpaced this growth, pushing the DAX’s P/E ratio to 17.6 – a significant increase from 15.0 at the beginning of 2024/2025. This suggests a potentially overvalued market, leaving it susceptible to correction.
The trajectory of interest rates is expected to be a dominant factor influencing market performance throughout the year. The yield on 30-year German Bunds reached a 14-year high in December and any further increases pose a substantial risk of dampening economic growth and negatively impacting stock markets. This pressure is particularly noticeable as investors grapple with the uncertainty surrounding future monetary policy decisions.
Positively, data released just before the turn of the year revealed a resurgence in China’s industrial sector, with the Purchasing Managers’ Index (PMI) exceeding the 50-point expansion threshold for the first time since March. This news has been welcomed by markets in Hong Kong and presents a potential tailwind for global trade.
The Euro, meanwhile, experienced a slight depreciation against the US dollar, trading at $1.1737. Safe-haven assets like gold are benefitting from the climate of uncertainty, with prices climbing to $4,385 per fine ounce. Oil prices are also experiencing a modest increase, with Brent crude fetching $61.33 per barrel.
The current market conditions highlight a complex interplay of factors – robust earnings data, high valuations, interest rate volatility and geopolitical events – that will shape the DAX’s performance and the broader European economic landscape in the year ahead. The crucial question for investors will be whether the initial cautiously positive start can be sustained amid these significant risks.
