DAX to the Future

Strap in as NASDAQ’s Michael Normyle and IBKR’s Jeff Praz take you “DAX to the Future,” breaking down Europe’s market rally in 2025. From rate cuts to defense booms, discover what’s powering the Eurozone’s warp-speed momentum.

Summary – IBKR Podcasts Ep. 238

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi everyone, this is Jeff Praissman with Interactive Brokers Podcast. It’s my pleasure to welcome back for a monthly podcast session NASDAQ’s U.S. economist, Michael Normyle. Hey Michael, how are you? 

Michael Normyle 

Doing well, thanks. How are you? 

Jeff Praissman 

Oh, I’m doing great and love having you on the show here. And this month we’re gonna discuss European stocks and how they’re off to a fairly hot start this year. 

Got the FTSE — as of right now, FTSE 100’s up 4.3% year to date, the CAC 40 up 8.6%, DAX is up 14.6%, and UAX is up over 7.8%. So I’d really like to discuss some of the reasons that Europe’s off to this hot start. Let’s start with inflation. Europe — how are they currently faring? 

Michael Normyle 

Yeah, inflation in the U.S. and the Eurozone are relatively equal but slightly more favorable in Europe. So for example, headline inflation in the Eurozone is 2.4% on an annual basis in February, compared to 2.8% for the U.S. using CPI. And in both countries, it’s really services inflation that remains the main driver of inflation. 

But while inflation in the U.S. is expected to be a bit stickier this year, with some upward pressure from tariffs, inflation is expected to ease in the Eurozone, partly due to slowing wage growth. In fact, the European Central Bank projects inflation to return to its 2% target by early next year. 

Jeff Praissman 

And where does the market think that the European Central Bank stands on rate cuts this year? 

Michael Normyle 

Yeah, so with that progress on inflation that we talked about, markets are expecting further rate cuts from the European Central Bank. They’re pricing about 100 basis points in total cuts this year, which would bring the rate down to 2%. That does include the 50 basis points in cuts that we’ve already seen this year. 

In comparison, the Fed obviously hasn’t cut at all this year, and markets are pricing 65 basis points in cuts — and that’s basically straddling two to three rate cuts. Back in mid-February, markets were only pricing 25 basis points in Fed cuts this year, so there’s been a pretty big shift in those expectations lately. 

So Europe is expected to get more cuts and to a lower overall rate compared to the U.S. 

Jeff Praissman 

And I certainly want to steer away from any political opinions in this podcast, but geopolitics plays a big part in any market. 

So what has been the effect of the U.S. stepping back from the Ukraine-Russian war and Europe, and what, if any, European industries are benefiting from this? 

Michael Normyle 

Yeah, you’ve seen a pretty strong response from Europe this year. The EU proposed a $158 billion fund — or 150 billion euros — for military spending and to support Ukraine. As of right now, it’s not a final deal, but it’s expected to cover things like air and missile defense systems, artillery systems, drones, and more. 

The EU also wants to raise hundreds of billions of euros on top of this fund to support further military spending. And this actually is pretty historic, since it would require relaxing restrictions on the size of deficits that EU countries can run. So this could amount to an 800 billion euro increase in military spending over this decade. 

The newly elected government in Germany is also talking about increasing defense and infrastructure spending. So naturally, we’ve seen European defense stocks react positively to this news. If you look at the STOXX Europe Aerospace and Defense sector, its stock price is up about 30% year to date through mid-March. 

Jeff Praissman 

And you’ve already mentioned Germany, but Europe’s obviously a diverse place. 

Are there certain countries that are gonna see maybe more of a benefit in the markets from this versus others? 

Michael Normyle 

Europe as a whole is doing quite well, with the STOXX 600 up about 7% through mid-March. And like the different indices you rattled off at the top of the podcast — for UK, French, and German stocks — they’re all doing pretty well to start the year. Definitely outpacing the U.S. 

But one country in particular that’s benefiting is Sweden, which has one of the biggest defense sectors in Europe. 

Michael Normyle 

So SAAB stock, for example, is up about 90% year to date. And the OMXS 30 index is up around 7%, so right in line with some of those other European countries that you were talking about to start the year. 

Jeff Praissman 

That’s actually really interesting. I don’t think most people would necessarily equate Sweden with a huge defense sector, but clearly they do. So that’s actually really interesting to learn. And again, going back to geopolitics— 

The world’s a big place. Yes, yet it’s a small place. Are there markets outside of Europe that are benefiting from this new investment in the sector by that kind of ancillary benefit? 

Michael Normyle 

Yeah, you’ve seen some defense stocks in Asia gaining as well. For example, the South Korean defense sector is up around 30% year to date, much in the same range as those European defense stocks or sectors. And there’s some recent history of Korean companies sending arms to Europe, with defense exports going to Poland and other European countries from Korea. 

Some analysts also think that Korean companies could help supply Northern and Eastern European countries in particular, where defense spending could rise as high as 5% of GDP, which would require another $56 billion in spending. And so it’s a lot of demand to meet domestically. And so that’s where other countries, like Korea, would benefit potentially. 

Jeff Praissman 

Kind of pivoting a little bit, because there’s also—besides the defense sector and the Ukraine-Russian war—there’s been a huge amount of focus on the U.S. and the tariffs and the relationship between the U.S. and Canada, Mexico, and China. Is this overall hurting, helping, or having a minimal effect on the European markets? 

Michael Normyle 

I’d say if those were the only tariffs markets expected, then you could expect Europe to actually benefit, since tariffs on Canada, Mexico, and China would make some demand for those goods shift to European substitutes. Of course, that’s not what we’ve seen. Tariffs on the EU have been discussed—they just weren’t first priority. 

And at this point, we don’t have complete details on them, so there is still uncertainty around tariffs on the EU. But that uncertainty alone can create drag on the European economy, as consumers and companies want to have more clarity before making big purchases or investments. 

And then, of course, the blanket steel and aluminum tariffs that we saw will impact the EU even if they’re not the sole target of those tariffs. So overall, I think what you’re seeing in European markets right now is other non-tariff-related drivers boosting markets, and even possibly offsetting some drag from trade policy uncertainty. 

You have the positives of continued rate cuts from the ECB, inflation returning to target, increased government spending—all working in a positive direction. And if you look at valuations as well, the valuations of European stocks are a bit lower—less expensive, you can say—than U.S. stocks. 

Jeff Praissman 

And while these markets are doing well in Europe, what are some of the other obstacles they may face politically that could derail the European economy? 

Michael Normyle 

There’s definitely a few factors. The EU—it’s a group of 27 countries—and these big expenditures and loosening of deficit rules require approval by a majority of them. So it’s a lot of countries that need to get on the same page with these things, and it’s always possible that the proposals we’ve seen already could change or shrink, and that would reduce their positive impact potentially. 

Then again, there’s the cost of these proposals. So we saw back in 2022 what can happen when markets worry about the cost of proposed budgets, with the UK’s mini-budget crisis. And already, in response to Germany’s proposed 500 billion euro infrastructure fund, 10-year German sovereign bond yields saw their biggest one-week increase since 1990—rising 40 basis points in a single week. 

Fortunately, everything is looking pretty orderly still with European bond markets, but of course, that can change. And then, if we see more tariffs implemented on the EU, that could reduce demand for European products. 

Jeff Praissman 

And obviously, besides the tariffs, economically, are there other challenges that they could be facing? Or does that sort of sum it up right there as the main culprit? Like, it seems it may be. 

Michael Normyle 

I think tariffs really are the big one, right? A number of European economies are highly export dependent. That’s one thing about the U.S. that makes tariffs a little bit less impactful. We’re actually not especially export-oriented—exports of goods and services are about 11% of U.S. GDP. But if you look at some of the major Eurozone economies, their export share of GDP— 

It’s over 40% for Germany, about 35% in France and Italy, and nearly 40% in Spain. So if tariffs hurt demand from the U.S. for those exports, they need to find another source of demand or they’ll take a hit to economic growth. The one caveat being that these big export shares of GDP do include the fact that these countries in the EU trade a lot with each other, given that free trade among those countries was a founding principle of the EU. 

So it’s not that they’re totally exposed to the U.S., but they do have significant exposure to the U.S. 

Jeff Praissman 

Michael, this has been great as always. Any final thoughts you’d like to leave our listeners with? 

Michael Normyle 

I think it’s worth recalling, after a few tough weeks for U.S. markets, that the U.S. markets obviously have performed very well over the last couple of years. If you look at the total return for the U.S. MSCI since the end of 2022, it’s up over 60%, compared to around 35% for Europe. 

So really, what we’ve seen for the U.S. to start the year — so far, it’s a blip. In the longer run, we’ll see if it continues or turns into something more. Not sure yet, but it is good to see that European economies and markets are recovering. And it’s possible, though, that some of the concern about the U.S. to start the year ends up being overdone. 

But we’ll see in the coming weeks and months here. 

Jeff Praissman 

Ah, great. Thanks again. For our listeners, you can find lots of great material from NASDAQ on our website under Education. Click on Contributors and click on NASDAQ — you’ll see webinars, podcasts, and articles. Also, you can always go to nasdaq.com and see educational material from their economic team as well. 

Michael, thanks again, and look forward to our next one. 

Michael Normyle 

Yeah, thanks for having me.