25,000 Points: A Number That Changes the Narrative
The DAX crossed 25,000 for the first time in its history in early 2026 — a milestone that would have sounded absurd during the energy crisis of 2022. Since then, the index pulled back into a range, but the underlying story has not changed: European equities are repricing structurally, and most US-centric portfolios have not fully registered what is happening.
I added European exposure in late 2025 through EWG (iShares MSCI Germany ETF) and VGK (Vanguard FTSE Europe ETF), and I've been watching the thesis play out through the first half of 2026 with a mix of conviction and caution. In this piece I want to lay out the data-driven case for European equities — and where the risks remain.
The Valuation Gap Is the Headline
The single most compelling argument for European stocks is price. The S&P 500 trades near 22× forward earnings as of May 2026 — well above its historical average of ~17.5×. The STOXX Europe 600 forward P/E sits near 15–16×, and Germany's DAX trades at roughly 14× forward earnings for its large-cap components. That is one of the widest valuation gaps between the two regions in 25 years.
About half of that discount can be explained by sector mix — Europe is heavier in financials, industrials, and energy; the US has a larger technology weighting. But adjusting for sector composition still leaves a meaningful absolute discount. For long-term investors, paying 14× for German industrial champions versus 22× for US tech at current growth rates is hard to ignore.
VGK's 52-week range through early May 2026 stretched from $73.52 to $90.75, with the ETF trading near $88 — already recapturing a significant portion of its post-2022 underperformance relative to SPY.
The Fiscal Catalyst: Germany's €500 Billion Infrastructure Bet
The structural story changed dramatically in early 2026 when Germany effectively abandoned its constitutional debt brake and announced a €500 billion off-budget infrastructure and climate investment fund alongside a defence spending increase of more than 1% of GDP. The 2026 defence budget alone reached €83 billion — a 24% year-over-year jump and the highest level in 36 years.
A Bank of America survey of European fund managers in early 2026 found that 74% expected growth to accelerate in Europe over the coming months, with 63% naming Germany's fiscal stimulus as the primary catalyst. That is a rare consensus among institutional allocators who are normally split on European macro.
The fiscal multiplier from this spending is front-loaded into defence and infrastructure companies: Rheinmetall, Thales, Leonardo, Airbus, and the broader industrial supply chain are direct beneficiaries. Defence and aerospace was the top-performing sector on the DAX through Q1 2026.
Goldman Sachs did flag a caveat — actual spending may fall short of headline targets due to procurement and execution bottlenecks. But even a partial delivery of this programme reprices the earnings trajectory for European industrials.
EUR/USD: The Currency Tailwind for Non-European Investors
For US-based investors holding EWG, VGK, or EWU (iShares MSCI United Kingdom ETF), the EUR/USD move in 2026 has added a meaningful tailwind. EUR/USD ranged from 1.1453 to 1.2019 over the 12 months to May 2026, with the rate sitting near 1.1785 as of May 11. The euro has gained approximately 6.3% against the dollar over the trailing year.
This matters for two reasons. First, for a US investor holding EUR-denominated European ETFs, that currency appreciation adds directly to total return in dollar terms. Second, EUR strength is itself a signal: it reflects dollar weakness driven by fiscal concerns, tariff uncertainty, and shifting capital flows out of US assets.
My base case is that EUR/USD remains supported in the 1.15–1.22 range through year-end 2026.
PMI and Growth: Modest, But Improving
The ECB revised 2026 eurozone GDP growth down to 1.0% (from 1.3% previously), largely reflecting tariff headwinds. The Eurozone Composite PMI came in at 51.9 in February 2026 before weakening in April.
These are not numbers that scream "buy Europe." But they need to be read in context. Fiscal spending has not yet hit the economy — the €500 billion fund is multi-year. Inflation at 1.9% HICP gives the ECB room to stay accommodative. And corporate earnings in the DAX have held up better than GDP suggests, because large German companies derive 40%+ of revenues internationally.
The ETF Toolkit: EWG, VGK, EWU
EWG — iShares MSCI Germany ETF: pure-play German exposure. Top holdings include SAP, Siemens, Allianz, Deutsche Telekom, Munich Re. The industrial and financial tilt makes it a direct proxy for the German fiscal stimulus thesis.
VGK — Vanguard FTSE Europe ETF: covers 1,200+ companies across large, mid, and small cap. Expense ratio: 0.06%. Trading near $88 in May 2026 vs a 52-week low of $73.52.
EWU — iShares MSCI United Kingdom ETF: UK-specific exposure. FTSE 100 forward P/E near 12–13× — even steeper discount to US peers.
I currently hold VGK as a core position and EWG as a higher-conviction satellite bet on the German fiscal cycle.
What Could Break the Thesis
Trade tariff escalation: German multinationals earn heavily in North America. A renewed US-EU trade dispute would hit EWG-heavy names disproportionately.
Energy price re-acceleration: If Middle East tensions push Brent back above $95, industrial margins compress quickly.
Defence rally reversal: Ukraine peace talks in early 2026 sent European defence stocks into reverse after their historic run.
Execution risk on German spending: The €500 billion fund sounds transformational. But Germany's bureaucracy has historically under-delivered on capital investment targets.
My Position and Outlook
I see European equities — specifically the DAX and broader EuroStoxx50 exposure via VGK — as a 12–18 month trade with structural properties. The valuation gap at 14× vs 22× forward P/E, combined with the fiscal stimulus cycle, EUR tailwind, and still-accommodative ECB, creates a backdrop that is unusual in its quality.
My target weight for European equity is 15–20% of equity exposure, split roughly 2/3 VGK and 1/3 EWG, with a smaller EWU position for UK value.
The DAX's first crossing of 25,000 was not noise. It was a signal.
— Ruslan Averin, averin.com