Defense spending boosts, German stock companies' profit growth is set to surpass that of U.S. stocks

While the market is still worried about Trump's tariff threats, German companies have quietly prepared for a profit explosion.

Bloomberg data shows that the profit growth of the constituents of the German DAX index is expected to reach 13%-15% in the second half of 2025 and 2026, surpassing the 13.5% growth rate of the S&P 500—this is the first time in recent years that the German stock market has outperformed the U.S. in profit expectations.

Kevin Thozet, a member of the investment committee at Carmignac, which manages approximately $39 billion in assets, bluntly stated:

"The German tiger is awakening. I hope more and more people realize that the average profit growth of German companies in 2026 should exceed that of the United States."

This expectation has been confirmed in stock performance. The German DAX index has soared 21% this year, leading all major global indices. In contrast, the pan-European Stoxx 600 benchmark index has only risen about 9%, while the S&P 500 only recently turned positive.

Military Engine Driven: Defense Spending as the Core of Growth

The main driver of profit growth in Germany comes from military stocks, as Europe is making significant investments to strengthen its military capabilities. Analysts expect Rheinmetall AG, Airbus, and MTU Aero Engines AG to contribute about 20% of the DAX index's earnings per share growth in the second half of 2025.

The energy transition, electric vehicles, and artificial intelligence sectors are also seen as key drivers, with increased investment in data centers, the electrification process, and the rise of new AI applications injecting momentum into these areas.

As previously mentioned by Wall Street Insights, the German cabinet has approved a corporate tax reduction plan worth about €46 billion ($53 billion), which includes a 30% tax deduction for newly purchased machinery starting in July, a gradual reduction of the federal corporate tax rate from 15% to 10% starting in 2028, and a 75% depreciation on the purchase price for electric vehicles in the first year. This is part of a broader effort to revive an economy that has stagnated for three consecutive years.

Additionally, the new Chancellor Merz's accelerated plans for defense and infrastructure spending could contribute 1.6 percentage points to economic growth in 2026. Analysts estimate that this roughly corresponds to a 6% boost to earnings per share for DAX companies and a 12% boost for mid-cap MDAX companies.

Resilience of German Companies Exceeds Expectations Amid Tariff Shadows

Analysts Kaidi Meng and Laurent Douillet point out that the German index may be less affected by the impact of U.S. tariffs than initially feared.

While automakers Daimler AG and BMW, as well as automotive chip manufacturer Infineon Technologies, are vulnerable to the Trump administration's tariffs on the automotive industry, the rest of the benchmark index is better protected. Software giant SAP and insurer Allianz, as service providers, have avoided commodity tariffs, while industrial giants like BASF and Siemens are protected by their U.S. production bases Jim Zelter, President of Apollo Global Management, stated in a media interview that Germany under the new government leadership is "a great place to do business."

"This is a $4 trillion economy, and their goal is to reach $6 trillion in the next 10 to 12 years. We are prepared to invest over $100 billion in capital through our financing tools."

Charu Chanana, Chief Investment Strategist at Saxo, believes:

"Germany is gaining strategic relevance, as investors seek to diversify away from U.S. policy and fiscal risks—aided by pro-growth reforms and industrial strength. Germany is not just riding the market wave; it is entering a potential era of policy revival."

The Barclays strategist Emmanuel Cau's team stated:

"Germany's long-term domestic outlook is improving, and a shift towards pro-growth policies and fiscal spending may drive investment."

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