Our stock market forecasts for the 2019 investment year were too pessimistic, with our 2019 year-end target of 12,000 DAX points having already been reached for the first time at the beginning of April. Since then, our price target for the DAX and the Euro Stoxx 50 has been slightly negative. Investors should be able to absorb our overly pessimistic forecast as they will have earned significantly more than expected in a shorter period of time. Indeed, the increase in the price of the DAX in 2019 until now (+16.4%) has exceeded more than twofold the average return of the index since 1987. However, the price rally is not being driven by sumptuous corporate profits but by the low starting base of share prices at the beginning of the year following the sharp correction in share prices in the fourth quarter of 2018.
After all, the first quarter results presented so far have not been particularly exceptional, either in the USA or in Europe. Profit growth of the Euro Stoxx 50 companies is stagnating while the S&P 500 recorded growth of a mere two percent. In Germany, corporate profits were even lower than in the previous year, with an average decline of three percent. At the beginning of 2019 we therefore initially experienced what we had been expecting since late autumn 2018: a visible slowdown in corporate earnings development in the major share indices and a decline in the more cyclically sensitive DAX. For 2019 as a whole, we do not expect companies to record any major profit leaps, and the eurozone economy is growing too weakly. Corporate profits in the Euro Stoxx 50 and DAX are unlikely to exceed more than five percent.
Nevertheless, there are increasing hopes of a revival in the economy. Compounding this is the fact that falling capital market yields are making equity investments appear more attractive in relative terms. Even if companies are showing slower growth in sales and profits in the late cycle than a few years ago, these parameters are still increasing. Investors can also see that companies in many places are responding to the weak economic situation by trying to cut costs. This should stabilize the earnings trend.
We expect this to be increasingly reflected in company figures from the second half of 2019 onwards. Backed by better news, demand for stocks should also pick up again, with the DAX and Euro Stoxx 50 rising slightly by the end of the year. In 2020, at least in the first half, currently our longest forecast horizon, the index gains can be expected to rise again more strongly. Although economic growth in the eurozone is expected to remain weak in the coming year, the global economic growth expected for 2020 (DZ forecast: +3.4% in real terms) should offer sufficient scope for a slight increase in corporate profits in the export-driven Euro Stoxx 50 and DAX in the region of seven to eight percent. If the DAX companies actually manage to generate the 1,000 index points in net profit expected for the first time by analysts in 2020, the DAX would be valued with a P/E ratio of 13.0 at 13,000 points in June 2020. This would represent a slight valuation premium over the average P/E ratio of the last ten years. This appears justified because investors will already be setting their sights on the 2021 estimates in the summer of 2020 and because there will not be any alternatives on the interest side next year that will make equities less exciting. The valuation ratios of stock markets are also being distorted on the upside by the low interest rates and capital market yields. For example, the low interest rates are lowering the refinancing costs of companies over the medium term.
The key issue for shareholders in the coming twelve months will remain the comparatively high dividend distributions (DAX 3.5%, Euro Stoxx 50 3.9%) which are gaining in importance in conditions of weak corporate earnings growth. Thanks to the dividends, investors are receiving an attractive „wait-and-see premium“ that outstrips the return on bonds more so than in a long time. This is compensating investors’ patient wait for better economic times. The risks for our stock market performance outlined above are essentially the same as last year, most notably the trade dispute between the USA and China, the danger of a disorderly Brexit and an interest rate shock.