A looming election, rising unemployment, and an auto industry crisis may not seem like a recipe for success for German companies this year, but a look at earnings forecasts tells a different story.
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(Bloomberg) — A looming election, rising unemployment, and an auto industry crisis may not seem like a recipe for success for German companies this year, but a look at earnings forecasts tells a different story.
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The companies that make up the DAX index are expected to achieve earnings-per-share growth of more than 10% in 2025, the highest among their European peers, according to data compiled by Bloomberg Intelligence. The 40-member gauge, which includes automakers BMW AG, Mercedes-Benz Group AG and Volkswagen AG, is the only European index to see a double-digit increase, more than the 7.1% average expected for the broader Stoxx Europe 600 index and before that. . 8.8% expected for the French CAC 40 index.
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Some caveats apply, according to BI equity strategists Kaede Meng and Laurent Douillet. Much of the growth will depend on a recovery in economically sensitive cyclical sectors and, most importantly, Germany’s beleaguered auto industry, which may not materialize until the second half, Douet said.
“This is not guaranteed,” they said, citing risks including their heavy exposure to China, a snap election in February that could change the domestic political landscape, and the emergence of potential US tariffs under Donald Trump, who is set to be inaugurated as president. On January 20th.
“This will make the earnings comparison base easier for this year,” said Douillet, who expects auto companies to publish some “kitchen sinking calculations in 2024,” and expects lenders to be Deutsche Bank AG, engineering giant Siemens AG, software maker SAP SE, and… Sports equipment Adidas AG and luxury car maker Porsche AG are likely to account for the lion’s share of the growth. He said many doubts remain.
“In the longer term, Germany’s GDP is at risk of another year of contraction, so clarity of government leadership and commitment to fiscal expansion will be crucial to reviving the slowing economy and evaluating the DAX.”
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The February 23 elections may herald the formation of a new government after Chancellor Olaf Scholz in November withdrew a tripartite coalition led by the Social Democrats. The conservative CDU-CSU bloc leads opinion polls with nearly 33% support from voters, according to the latest Bloomberg tally. The far-right Alternative for Germany party ranks second with 18%, while the Social Democrats trail behind in third place with 16%.
Politicians have so far failed to come up with answers to revive Germany’s faltering economy, which the Bundesbank expects will barely grow in 2025 after contracting last year, according to its latest forecasts.
What’s important is that the election “offers some potential to ease the debt base,” JPMorgan analyst Sophie Warrick said in a note dated December 12, referring to Germany’s self-imposed borrowing limit, called the… “Debt curb.”
A higher-spending, pro-growth government in Berlin would be a positive surprise, Barclays analysts said in a December 4 note.
Hopes that struggling sectors may rebound after a difficult 2024 mirror similar expectations emerging in the broader European stock market, which continues to lag behind the United States. While the Euro Stoxx 50 could show earnings growth of 7.5%, after a 4% decline last year, that would require a rebound in cyclical sectors such as consumer discretionary, energy and technology and continued growth in industrials and financials, BI’s Meng and Douillet said. . .
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“In terms of economic growth, Europe – and especially its Franco-German core – is currently and will remain in 2025 the weakest link,” Oddo BHF strategists led by Tomas Zlodzki wrote in a December 10 note.
Some analysts have begun lowering their forecasts for European earnings growth for 2025.
“We think eurozone stocks will continue to struggle, both in absolute and relative terms, for a while longer,” JPMorgan’s Warrick said. “On the positive side, valuations and positions are already low, and this could lead to some recovery once tariff risks, earnings risks and geopolitical risks are absorbed.”
– With assistance from Michael Msika.
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