German stocks rise after the election. What analysts expect now.

MW German stocks rise after the election. What analysts expect now.

By Steve Goldstein

A coalition between the CDU/CSU and the SPD looks in the cards

German stocks rose on Monday as election results indicated it's likely a government will be able to be formed between the main center-right and center-left parties.

The German DAX DX:DAX opened 0.8% higher - with 37 out of 40 components rising - as defense contract Rheinmetall (XE:RHM), automaker BMW (XE:BMW) and tire maker Continental (XE:CON) climbed.

In the mid-cap MDAX XX:MDAX, 49 out of 50 stocks rose.

U.S. stock-market futures (ES00) also advanced after a weak finish on Wall Street on Friday.

The iShares MSCI Germany ETF EWG has already gained 13% this year as investors bet on a more favorable landscape for German companies.

The CDU/CSU grouping led by Friedrich Merz looks set to join ranks with the Social Democratic Party led by outgoing Chancellor Olaf Scholz. Even though they combined for less than 50% of the vote, two smaller parties, the far-left BSW and the liberal FDP, look like they will not exceed the 5% minimum to enter into parliament.

"Having only one option may limit the Conservatives' leverage in negotiating key policy reforms, such as tax cuts. At the same time, the prospect of a two-party coalition led by a strong CDU/CSU will likely be seen as a positive by Germany's corporate sector, promising less policy gridlock and uncertainty than under the outgoing government," said Deutsche Bank analysts led by Marion Muehlberger.

But they noted that even with the Greens, the parties will not have the 66% level needed for a constitutional majority to amend the country's debt brake. While the far-right AfD and The Left Party have little in common, they both oppose aid to Ukraine, therefore making it very difficult to reform the debt brake to boost defense spending, said Holger Schmieding, chief economist at Berenberg Bank.

Analysts expect the actual formation of a new government to take months. The SPD after a bruising defeat is likely to undergo its own leadership battle before engaging in coalition talks. Merz said he would like to form a government before Easter - April 20 - which analysts at ING say should be possible.

They say tax cuts for households and corporates as well as some deregulation may emerge, but pension system reform looks unlikely.

-Steve Goldstein

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February 24, 2025 03:21 ET (08:21 GMT)

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