Germany's benchmark DAX index closed 0.6% higher on Thursday, buoyed by better-than-expected economic growth data that offered a glimmer of hope for Europe's largest economy. However, the mood was tempered by rising inflation and a sharp sell-off in shares of sportswear giant adidas, which fell 11.5% after its quarterly results failed to meet elevated expectations.
GDP beats forecasts but recovery remains uneven
The Federal Statistical Office (Destatis) reported that Germany's economy grew by 0.2% in the second quarter compared to the previous three months, slightly above the 0.1% forecast by economists. The figure marks a slowdown from the revised 0.4% growth recorded in the first quarter, underscoring the fragile nature of the recovery.
While the GDP beat provided a short-term boost to investor sentiment, the broader picture remains mixed. The German economy has been grappling with high energy costs, weak global demand for its exports, and lingering uncertainty over the conflict in Ukraine. ING, a Dutch bank, noted that Germany's near-term outlook is "highly dependent" on energy prices and the war in the Middle East, as a wider conflict could disrupt fuel supply or shipping routes that European industry relies on. Higher oil and gas costs tend to squeeze corporate margins and consumer spending, which could weigh on growth in the months ahead.
Inflation ticks up to 2.8% in July
Adding to the cautious mood, preliminary data showed that German inflation rose to 2.8% in July, up from 2.5% in June. The increase was driven largely by higher energy costs, which have been volatile amid geopolitical tensions. While inflation remains well below the peaks seen in 2022, the uptick is a reminder that the European Central Bank's battle against rising prices is not yet over.
For investors, the combination of modest growth and sticky inflation creates a tricky backdrop. The ECB has already raised interest rates to multi-year highs to cool the economy, and any further acceleration in inflation could delay the timing of rate cuts that markets have been hoping for. Higher rates tend to make borrowing more expensive for companies and consumers, which can slow economic activity and weigh on stock valuations.
Germany's inflation data also comes as the broader eurozone economy showed signs of resilience, with the region growing 0.4% in the second quarter, beating forecasts despite higher energy costs. That contrast highlights the uneven nature of the recovery across the currency bloc.
adidas slides on 'good but not good enough' results
In corporate news, adidas shares suffered their biggest one-day drop in months after the company reported quarterly results that analysts described as "good but not good enough." The sportswear maker posted earnings that met or slightly exceeded expectations, but the market had priced in an even stronger performance, given the company's recent turnaround efforts and the fading of its Yeezy inventory issues.
The sell-off reflects a broader theme in earnings season: companies that merely meet expectations are being punished, while those that beat by a wide margin are rewarded. For adidas, the challenge is that its recovery story is already well-known, leaving little room for error. Investors will now watch for signs of sustained demand in key markets like China and North America, as well as any updates on the company's strategy to replace lost Yeezy revenue.
The broader European earnings season has been mixed, with the energy sector driving much of the profit growth in the second quarter, as higher oil prices boosted margins for companies like Shell. Meanwhile, other sectors such as consumer goods and retail have faced headwinds from rising costs and cautious consumers.
What it means for investors
For everyday investors, the German data and adidas' stumble offer several takeaways. First, the GDP beat is a positive sign, but it does not signal a robust recovery. The economy is still growing slowly, and the risk of a downturn remains if energy prices spike or geopolitical tensions escalate. Investors should not assume that one quarter of above-forecast growth means the coast is clear.
Second, rising inflation is a reminder that central banks may keep interest rates higher for longer than many expect. That could continue to pressure growth stocks and companies with high debt levels, while benefiting sectors like energy and financials that tend to perform well in a higher-rate environment.
Finally, the adidas episode illustrates the importance of expectations in stock market moves. Even a solid earnings report can lead to a sharp decline if the market had already priced in a stronger outcome. Diversification across sectors and regions can help mitigate the impact of such single-stock shocks.
Looking ahead, investors will be watching for further economic data from Germany and the eurozone, as well as any developments in energy markets and central bank policy. The path for European equities remains uncertain, but the DAX's modest gain on Thursday suggests that markets are still willing to give the recovery the benefit of the doubt—for now.
