DAX companies have come through the crisis year 2020 very well. The reporting season for the final quarter is still underway, but company sales are expected to have fallen by only four percent last year. Profits should have been 14 percent lower than in 2019. In previous recessions, profits fell by an average of one-third, much more than last year.
Equity analysts expect profits in Germany’s leading index to rise by 30 percent this year and post record profits again as early as 2022. Although companies‘ earnings expectations in the past have (almost) always proved to be too optimistic in retrospect, this assessment is in line with the course of previous earnings cycles on the stock market. As a rule, it took around two and a half years for the old profit highs to be reached again. The prerequisite for a sustained recovery in corporate profits remains a stable forecast of the course of the Corona pandemic and the associated extent of the restrictions for each individual. One risk to the forecast is a significant deterioration in the infection situation due to virus mutations.
The good global economic trend in 2021/22 should also boost DAX companies. These have a stronger export position than the „average“ German company. Because it is now becoming apparent that the recovery in profits will take place by 2022 instead of 2022 or 2023 as we previously forecast, share prices should also benefit more quickly than previously expected. The second reason, in addition to the better earnings performance, that leads us to revise our stock market forecasts, is the improved outlook for the political environment compared with November 2020. Brexit and Donald Trump have now (finally) been removed as „sources of volatility“ for the markets, which could not have been foreseen with such clarity at the beginning of November, so politics should become more predictable in 2022 than in the past four years.
We are raising our index forecast for the DAX to 15,000 points at year-end (previously: 14,000). The Euro Stoxx 50 should reach 3,800 (3,600) points as of Dec. 31. Based on current consensus earnings estimates for 2023, the DAX and Euro Stoxx 50 would be valued at price/earnings ratios of 13.9 and 14.7 respectively if these forecasts were to materialize. In a historical comparison, the markets would then be somewhat more expensive than in the past, but in view of the generally very friendly liquidity and central bank environment, this premium is also justified.
On the way to new stock market highs, mainly because of the still uncertain outlook for the further development of pandemic control, prices should repeatedly reset before continuing to climb thereafter. Market setbacks happen frequently, and no one can always predict them accurately. We would not be surprised to see a moderate setback after such a strong rise. Nevertheless, we are only at the beginning of a new „bull market,“ driven by a sustained economic recovery, attractive equity valuations relative to bonds, and more than a decade of underinvestment in equities relative to bonds.