Germany's DAX, the country’s leading blue-chip stock index, reached an unprecedented milestone on Tuesday morning by crossing the 20,000-point threshold. This historic achievement came shortly after trading opened, marking a rare moment of optimism amid broader economic struggles.

Having hovered near the 19,000-point mark recently, the DAX has seen a significant rally over the past week, defying grim economic indicators. Despite narrowly avoiding a recession in the third quarter, Germany is expected to face an economic downturn this winter. Moreover, recent announcements of job cuts at major industrial companies like Thyssenkrupp and Bosch, as well as Volkswagen’s ongoing challenges, paint a concerning picture for the domestic economy.

Political instability further complicates matters. Infighting within Germany’s three-party ruling coalition led to the government’s collapse, triggering snap elections scheduled for February. Coupled with persistent inflation, declining industrial output, and falling business morale, the outlook for Europe’s largest economy remains bleak.

Why Is the DAX Thriving?

Paradoxically, while the domestic economy falters, the DAX continues to climb. Analysts attribute this to the global footprint of the 40 multinational corporations that make up the index. Ben Ritchie, head of developed market equities at abrdn, explained that the DAX is largely insulated from Germany's economic troubles.

"The revenues for these companies aren't in Germany. So the German economy doesn't matter," Ritchie noted. Major firms listed on the DAX derive most of their revenues from international markets, making their performance more reliant on global trends than domestic conditions.

SMEs Struggle Amid Domestic Challenges

While DAX-listed corporations benefit from their global operations, Germany’s small and medium-sized enterprises (SMEs) — which employ over half of the country’s workforce — are far more exposed to domestic challenges. These businesses face rising costs, structural hurdles, and weak consumer spending.

The disparity between large corporations and SMEs is reflected in the Ifo Institute’s recent business sentiment survey, which reported a larger-than-expected drop in morale among German businesses. Franziska Palmas, a senior Europe economist at Capital Economics, described the results as evidence that the German economy “remains in the doldrums.”

Weak Economy: A Hidden Advantage for Stocks?

Surprisingly, a sluggish German economy may indirectly bolster DAX-listed companies. A weaker domestic economy often leads to a lower euro and reduced borrowing costs, as the European Central Bank implements measures to stimulate growth. These factors can enhance the competitiveness of German exports and reduce financing costs for multinational companies, even as domestic demand stagnates.

Meanwhile, stronger economic performance in key overseas markets, such as the United States, has played a significant role in the DAX’s recent gains. Robust consumer spending, driven by fiscal stimulus and low energy prices in the U.S., has created favorable conditions for many German multinationals.

While the DAX’s milestone offers a glimmer of hope, it underscores the divide between Germany’s globally-focused corporations and its struggling domestic economy.