DAX strength belies Germany’s tough corporate earnings environment

Germany's companies have faced significant disruption in recent years, from the loss of cheap Russian energy supplies to trade tensions and slumping export markets. Business confidence fell for a fourth straight month in September.

We can shine a light on these troubles by compiling financial data from companies traded on the Frankfurt stock exchange.

As our chart shows, aggregate earnings from all traded companies declined in the first half -- the first time that has happened since 2021. We've charted two earnings measures: operating income (otherwise known as EBIT, which dropped 27% over six months) and EBITDA -- earnings before interest, taxes, depreciation and amortization, which posted a more moderate decline.

Interestingly, this earnings drop coexisted with a healthy performance by the DAX index of blue-chip stocks. Higher interest rates (and takeover speculation) have helped financial-services stocks, which have different dynamics to manufacturers and exporters.

Germany's weak performance is causing problems for the European Union as a whole; the bloc's economy posted a surprise contraction in the second quarter. Our second chart looks to the future with the help of our partners at Now-Casting Economics.

Their nowcast suggests the German economy will contract at an 0.5% quarter-on-quarter rate in Q3, which means the country will be in technical recession. That is potentially more pessimistic than the outlook from the Bundesbank, which has said that it expects real GDP to stay stagnant or contract in Q3.

Our final chart addresses the purchasing managers index (PMI), a gauge of executive sentiment. It reaffirms the gloomy outlook; activity in German manufacturing kept contracting in September, reaching one-year low of 40.3. Services PMI declined to 50.60, meaning the sector expanded but at a slower pace; the value remains above 50, the threshold that separates expansion from contraction. This combined dynamic pushed the composite indicator down to 47.2 from 48.5.

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