Is Germany the new USA?
17 JUN, 2025
By Alexis Bienvenu
Since the beginning of the year, the German stock market has charted an impressive trajectory. While global equities have risen by 2.7%, the DAX has gained 22%, far ahead of the 10.7% increase in European equities.
For several months now, everything seems to be going well for the German stock market: a new conservative Chancellor, seemingly favourable to investors—albeit constrained by leading a broad coalition (an ideal setup for markets); a historic reform of budgetary rules, backed by an unusual national consensus, allowing for economic stimulus through borrowing; a massive plan to boost defence and infrastructure spending, encouraged by the European Union; and, lastly, a political will to support long-term productive investment, as shown by the corporate tax proposal unveiled on 4 June. This plan aims to cut the German corporate tax rate by five percentage points by 2032.
But is Germany the new USA? Will capital flood the Rhine, as it has in Silicon Valley for decades? This idyllic scenario is tempered by several headwinds.
First, the plan to reduce corporate taxation is not exactly massive: €46 billion by 2029—just under 1% of GDP over four years—which will not radically transform the economic landscape. The new defence and infrastructure spending plan is far more significant, totalling nearly €1 trillion over 12 years, but it is not expected to produce tangible effects before 2026. Until then, economic growth forecasts remain weak, projected at just 0.1% in 2025 according to Bloomberg consensus, following two slightly negative years, and only 1.1% in 2026. This is far from a major acceleration, although forecasts could be revised upward for once.
Moreover, Germany faces a particular vulnerability in the US-led trade war: its economic structure is highly sensitive to global trade due to the importance of exports in corporate revenues. With global growth prospects dampened by US measures, there will be a considerable headwind to overcome.
Lastly, the German market has been driven largely by just two sectors, at the expense of the rest: capital goods, such as Rheinmetall and Siemens Energy, and SAP, the country’s tech crown jewel. However, these stocks are now very expensive: Rheinmetall, up 205% year-to-date (and 2,400% over five years!), trades at over 60 times the 2025 expected earnings per share, according to Bloomberg consensus, compared to 17 times for the DAX; Siemens Energy, up 77% this year, trades at a similar P/E ratio to Rheinmetall. At such valuations, positive surprises seem unlikely, while the impact of any disappointment would be significant.
That said, large-cap stocks do not make up the entirety of the country’s stock market. Small-cap firms offer several advantages. Although they have risen 25% this year, they still lag significantly behind large caps over the past five years. Less exposed to global trade fluctuations, but also supported by domestic stimulus plans, these stocks could perform very well in the coming quarters—provided a positive confidence loop can be established.
The current government's stance will be crucial in maintaining the renewed optimism in the country. If it succeeds, as it has so far, it could reap the benefits of a partial reorientation of capital flows traditionally directed towards the US—at a time when other European countries are mired in budgetary woes. The early signs are encouraging.
After Silicon Valley, is it time for the ‘Metall Valley’ on the Rhine?
