In just a few weeks, the bursting of the dotcom bubble on 10 March 2000 will mark its 25th anniversary. It seems like a strange coincidence that the Dax has been going wild precisely at this moment. A correction appears inevitable. While bulls put forth numerous arguments to fundamentally justify the German benchmark index’s rally in recent months and downplay the risk of a setback, they fail to convince, even when all taken together.

Neither the hope for a more business-friendly policy under a new government, nor the claim that the companies in the Dax are global players rather than a reflection of the German domestic economy, can justify a bull market of this magnitude.

The rally that began in the second half of last year, driving the Dax up 13% from early August to its year-end closing level of 19,909 points, has continued with even greater momentum in 2025. Since the beginning of the year, the index has surged by 15%, or 3,026 points, reaching a recent record high of 22,935 – an overall increase of 32% in the past six months.

Stocks are being bought in a frenzy, and the Dax has been setting a series of records. The rotation of favourites – banks and insurers one day, previously unloved automotive stocks the next, and IT companies consistently at the top of buy lists – is generally a sign of a sustainable upswing. However, closer examination raises questions. How is it possible that while the construction industry is plagued by negative headlines, Heidelberg Materials and Hochtief, which is listed in the MDax, have reached peak values? And speaking of mid-caps: how can companies like Gea, Krones, and KSB, all from the mechanical and plant engineering sector – an industry that has done nothing but complain – also be reaching long-term highs? These are clear signs of an overheated market.

Investors are becoming cautious, and preparing for a sharp correction, as indicated by various measures of put options. The implied volatility, which reflects expected price fluctuations, has reached its highest level in years for Dax put options with short to medium expiration periods. Everyone knows from experience: if a correction sets in, prices will fall at a much faster rate than they rose. And early-year rallies typically run out of steam by the second half of February.

The development of the VDax-New is also a warning signal. This volatility index, calculated by Deutsche Börse, measures the expected fluctuation range of the Dax over the next 30 days. A high value suggests a turbulent market, while low values indicate a stable one. While this „fear barometer“ does not explicitly predict the direction of price movements, its cyclical peaks have historically occurred during correction phases, such as during the Covid-19 pandemic. Since mid-December, the VDax-New has risen from 12.75 to over 18. While not an alarming level in itself, what is troubling – at least for the bulls – is that this increase contradicts the usual movement seen during a rising Dax.

Looking at a longer time frame, the need for a correction becomes even clearer. In the fall of 2022, after the shockwaves from Russia's attack on Ukraine had rocked the markets in spring and summer, the Dax stood at 12,000 points. Since then, it has climbed almost uninterruptedly. Even the biggest consolidation, an 11% decline from early August to late October 2023, was relatively mild.

Starting from the Dax level in autumn 2022, the index has gained 90%. But what has changed so significantly for the better, economically or politically, to justify such an increase? The simple answer: nothing. Even the temporarily lower energy costs have since surged again. Instead, uncertainties have only grown, both nationally and internationally. This uncertainty discourages managers from making investment decisions that involve significant risks, even if the profit potential is substantial. As a result, Germany is heading for its third consecutive year of recession – hardly a solid foundation for a thriving stock market.

Focusing on the uptrend since last summer, the most relevant change for the German economy has actually occurred in the White House. Donald Trump is back in office, and no one would claim that his policies align with Germany’s economic or political interests. Domestically, the formation of a new government is expected to be difficult, and regardless of the coalition that emerges, key initiatives – such as significant deregulation or tax cuts – are unlikely to materialise, making it hard to foster an economic revival.

Ultimately, the ongoing Dax rally is itself being fuelled by the US stock market boom. But across the Atlantic, valuations – especially those of IT giants like the „Big Five“ and AI-related tech companies – have become detached from realistic revenue and profit expectations. Once the euphoria subsides and investors start considering the economic downsides of protectionism and nationalism, the market excesses will become evident. This will lead to a correction on Wall Street, which will, in turn, drag stock markets worldwide down with it.