Through the first four months of 2026 the DAX 40 returned roughly twice the S&P 500's return in EUR terms. In USD terms (after EUR weakness) the gap is narrower but Europe is still on top. The consensus narrative going into the year was the opposite — US AI exposure, US growth, weak European cyclicals. The actual driver was less exciting.
What actually drove DAX outperformance
- Re-rating of European industrials — the multiple gap to US peers compressed as German chemicals, autos and industrials reported less-bad earnings than feared.
- Defence cyclical — Rheinmetall and others continued to benefit from sustained European defence spending commitments.
- Energy normalisation — TTF gas back in a manageable range removed the existential tail-risk premium that haunted German balance sheets in 2022–23.
- Currency tailwind — DAX constituents earn a significant share of revenue in USD; the weaker EUR boosted translated earnings.
What the consensus got wrong
Two things. First, the AI capex narrative concentrated outperformance in seven US stocks; the rest of the S&P broadly lagged, dragging the equal-weight index. The DAX has no equivalent concentration cohort, so its breadth was wider. Second, low expectations create asymmetric upside — European earnings beats moved stocks more than equivalent US beats.
What could reverse it
Tariff escalation aimed specifically at EU autos or steel. A China growth disappointment that hits the German exporter cohort. A US AI capex disappointment that re-rates the magnificent-seven and pulls the S&P higher via mean reversion. Each is a watch-item, none is a base case for the next quarter on most desks.