Stock market: Dax at record level – four developments explain the year-end rally

The Dax surpassed the 27,000 point mark for the first time on Thursday, setting its second record within six trading days.

The significantly fallen oil price is lowering inflation expectations in the euro area and thus also capital market interest rates, which makes financing cheaper for companies and improves profit prospects.

Investors are reducing their stake in AI-related technology stocks, especially chip manufacturers, and are turning to the DAX with its lower AI dependency.

Several DAX companies have raised their annual forecasts after strong quarterly figures; 14 companies could achieve record net profits this year, which, together with positive seasonality, supports the market environment.

Dusseldorf. The Dax rose above the 27,000 point mark for the first time on Thursday. At its peak, the leading German index rose by a good one percent to almost 27,002 points.

It is the second record within six trading days. The previous high was last Thursday at 26,693 points. Analyst Jochen Stanzl from Consorsbank therefore says: “The year-end rally doesn’t start – it continues.” The increase has now been seven percent since the beginning of October.

There are four reasons for this development. It will likely depend on them whether the upward trend continues.

Lower oil prices

Even though the price of oil rose slightly again on Thursday, the price has fallen significantly since the beginning of the month. A barrel (159 liters) of North Sea Brent for delivery in one month currently costs around $94. At the end of October the price was almost $118. The annual high from April is even over $126.

“The hope for peace in Iran is making the important energy sources at least a little cheaper again,” says portfolio manager Thomas Altmann from asset manager QC Partners. This also reduces inflationary pressure. This is signaled by the so-called “5y5y forward inflation rate”, which reflects long-term inflation expectations in the euro area. Since mid-September it has fallen from just under 2.2 percent to under 2.1 percent.

The key figure describes what average inflation market participants expect for a period of five years, starting in five years. This means that inflation expectations are approaching the European Central Bank's (ECB) inflation target, which is two percent.

Due to lower inflation expectations, capital market interest rates are also falling. The yield on ten-year federal bonds was just under 3.3 percent on Thursday. At the end of September it was still 3.65 percent.

This makes the financing conditions for companies more favorable. The federal bond is considered the most important benchmark for the general long-term interest rate level in Germany and the entire euro area.

“This creates a particularly favorable combination for the stock markets: better profit prospects while at the same time decreasing cost and interest rate pressure,” says analyst Andreas Lipkow from online broker CMC Markets.

Rotation from Tech

At the same time, the Dax is one of the winners of the ongoing rotation on the stock market: investors are reducing their share of tech stocks, especially those closely related to artificial intelligence (AI). This is particularly evident in chip stocks.

The South Korean leading index Kospi, which depends largely on the two memory chip manufacturers SK Hynix and Samsung Electronics, has lost more than 20 percent of its value since the beginning of the month. The US chip index Philadelphia Semiconductor fell by 16 percent in the same period.

The change in mood also affects the entire tech industry. The broader US technology index Nasdaq Composite has fallen five percent since the beginning of October. When looking for new investment opportunities, the DAX with its low AI dependency is a natural alternative.

Rising corporate profits

The DAX is also supported by the fundamental development of companies, explains Lipkow: “Investors are concentrating on falling energy prices and the pleasing quarterly figures from German companies.”

Around a dozen of the 40 DAX companies have raised their forecast for the current financial year in recent weeks when presenting their quarterly balance sheets. The most recent examples on Thursday were Merck and Siemens.

Merck raised its forecast for the third time this year. The reason for this is the high demand for semiconductor materials. After a record profit, Siemens also raised its sales targets for the fiscal year that began in October.

In total, the 40 DAX companies earned 87.6 billion euros after all costs in the first nine months. That was 8.6 percent more than in the same period last year. Analysts are forecasting an average of 121 billion euros for the year as a whole. That would be nine billion euros more than in 2025 and almost as much as in the previous record year of 2021.

14 DAX companies are expected to earn more net this year than ever before, including Europe's largest software manufacturer SAP, Germany's largest arms company Rheinmetall, the construction group Hochtief, the insurers Allianz, Munich Re and Hannover Re as well as Deutsche Bank and Commerzbank.

Positive seasonality

The DAX also benefits from positive seasonality: the fourth quarter is traditionally the strongest on the stock market.

Stanzl from Consorsbank therefore states: “The prospect that, in the big picture, the Dax will now finally leave a one-year sideways phase and move into an upward trend is attracting investors.”

Since its inception in 1988, the leading index has risen in the fourth quarter in 34 out of 38 cases. The balance is even better if you just look at the years in which the DAX was in the black after nine months. Then the hit rate increases to 23 out of 24 cases.

The tendency is: the smaller the Dax plus was until the end of September, the stronger the next three months will be. If the index recorded a maximum increase of ten percent in the first nine months, it rose by an average of 15 percent by the end of the year.

Against this background, it could prove supportive that the DAX only showed an annual increase of 2.9 percent at the end of September. An increase of 15 percent by the end of the year would mean prices of almost 29,000 points.