Germany’s Fiscal Boost Remains a Tailwind Despite Near-Term Risks

German equities entered 2025 with strong momentum, supported in part by a sharp shift in Germany’s fiscal outlook. After years of underinvestment, the government announced materially higher spending on infrastructure and defense. However, that momentum faded through 2025 into 2026, and German equities stalled (Figure 1). Slow implementation of the announced fiscal packages, limited exposure to artificial intelligence (AI)-driven market sentiment relative to the United States, intensifying manufacturing competition from China, and, more recently, the war in Iran, have all created notable headwinds. Even so, we remain constructive on Germany and, by extension, the euro area over the medium term. Subdued sentiment in the region creates upside potential, particularly since the growth impulse from fiscal stimulus should build throughout the year. While the conflict with Iran poses near-term risks, it may also reinforce the case for further fiscal expansion in Germany and greater policy coordination across the EU in the medium term. Together with still-discounted valuations, these factors support our tactical preference for global equities outside the United States over US equities.

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