Hope for a Rebound in German Industry Drives Wider Stock Market Gains

German Small and Mid-Cap Stocks Take the Lead

In recent years, Germany's stock market has seen its major indexes outperform much of Europe, but many smaller companies were left trailing. That trend is now reversing.

In 2026, indexes tracking Germany’s small and mid-sized firms are outpacing both the flagship DAX and the broader Stoxx 600, continuing momentum that began last year.

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Among the ten best-performing stocks in the MDAX over the past year, eight have seen their value more than double. Thyssenkrupp AG, an engineering firm, soared by 235%, while defense contractor Renk Group AG jumped 180%.

This marks a significant shift from the post-pandemic period, when investors favored large corporations. From 2021 to 2024, smaller companies generally lagged, especially after Russia’s invasion of Ukraine in 2022.

The current resurgence is fueled by an improving economy—Germany’s GDP grew in 2025 after two years of decline—and expectations of increased government spending on defense and infrastructure.

Mathieu Racheter, who leads equity strategy at Julius Baer, anticipates that German small and mid-sized companies will draw more investor interest this year as fiscal stimulus spreads through the economy, benefiting firms with a domestic focus.

While defense companies have been in the spotlight due to Europe’s increased military budgets, the rally is spreading. Over the past six months, companies like Verbio SE (biofuels), Schaeffler AG (auto parts), and Hochtief AG (construction) have all seen their shares more than double.

Economists expect Germany’s growth to accelerate in 2026 and beyond, as businesses adapt to tariffs and construction and manufacturing rebound.

Additionally, a massive €500 billion infrastructure program and higher defense spending could inject over €1 trillion into the economy, according to Finance Minister Lars Klingbeil.

However, some investors remain cautious about whether these funds will be used effectively. Concerns persist that money might be diverted to fill budget gaps or fund subsidies, rather than being invested in new projects, especially given Germany’s challenges with outdated infrastructure and slow internet.

Market Outlook and Risks

Tom Ackermans, a portfolio manager at Fidelity International, warns that global instability could disrupt the current rally. “There are many possible outcomes for the German market in 2026,” he notes, adding that geopolitical risks could have a greater impact on returns than usual.

Despite these uncertainties, the environment remains favorable for German small and mid-cap stocks to continue outperforming. Government spending is likely to benefit these companies more, as large DAX firms earn only about 20% of their revenue within Germany, compared to 33% for MDAX constituents.

Valuations for these stocks also remain attractive. The MDAX’s price-to-earnings ratio is near its lowest point relative to the DAX since 2009, suggesting further room for gains. Both indexes are projected to achieve double-digit earnings growth, according to Deutsche Bank AG.

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, believes German equities remain appealing, with the MDAX offering the best exposure to the country’s market.

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