European small caps have outperformed in 2025 and are poised to continue their winning streak, Goldman Sachs believes. Meanwhile, U.S. small caps are lagging their large-cap peers. 

Details

European small caps have outperformed this year and that trend should continue, said Goldman Sachs senior strategist Sharon Bell on CNBC’s “Squawk Box Europe” on Thursday, July 17.

Year to date, the MSCI Europe Small Cap Index has risen almost 11%, while the German SDAX index, comprised of 70 small-cap companies, has soared more than 32%. The pan-European Stoxx 600 is up 7.9% this year.

The situation in Europe "is very different from the U.S. … [where] it’s the mega caps that have done very well," Bell explained. The small-cap-tracking Russell 2000 has significantly underperformed the S&P 500 U.S. broad-market index this year. 

Goldman argues that the strong performance of small European stocks is due to expectations of an improving EU economy and a weakening dollar. Since the beginning of the year, the euro has strengthened almost 12.5% against the dollar, a factor this is especially important for small companies that typically focus on domestic markets.

In addition, small caps still look cheap relative to large caps, which are "at all at all-time highs and extremely stretched in valuation terms," Bell believes. "And we have seen a pick-up in M&A, [which] I do think will continue to improve next year, and in the end, all small caps get bid up when you start seeing people’s expectations for M&A improve."

'Massive pivot'

According to BofA’s July European Fund Manager Survey, as reported by CNBC, a net 44% of respondents expect small caps to outperform large caps over the next 12 months. Just a month before, only 7% of fund managers told BofA they believed small caps would outperform.

The AI translation of this story was reviewed by a human editor.

Share