Small caps outperforming large caps in Europe since April – can the momentum last?

Since mid-April, the Stoxx Europe Small 200 has outpaced the STOXX Europe Large 200, gaining 21% versus 17%. Asset managers surveyed by Bloomberg say the rally in European small caps is only just getting started.

The Stoxx Europe Small 200 index has surged 21% from its April 9 low in the wake of Trump's trade agenda rollout. By comparison, the STOXX Europe Large 200, which tracks large caps, gained 17% over the same period.

“At the beginning of the year... not many people wanted to talk about small caps. Now it is sort of the opposite: everybody’s very interested in having a conversation," Michael Oliveros, head of global small caps at Invesco, an asset manager, told Bloomberg. Oliveros’ Invesco Continental European Small Cap Equity fund has Austrian bank Bawag Group, Swedish firm Asker Healthcare Group (which buys companies in the healthcare sector), and UK construction materials company SigmaRoc among its biggest holdings.  

Alken Asset Management, Nicolas Walewski’s small-cap fund, has beaten 99% of peers this year. It has leaned into the boom in defense shares spurred by the fiscal reform in Germany, buying stocks such as France’s Exail Technologies, which produces inertial beacons used for submarine navigation. The stock is up over 550% in 2025. “There is a phenomenal acceleration in their backlog, they have great margins and no capacity constraints,” Walewski said, as quoted by Bloomberg. “It is going ballistic and it is justified.”

 About 68% of the revenue of companies in the MSCI Europe SMID Cap index is generated in Europe and only 18% in the U.S., according to data from asset manager Amundi as of April.

Benjamin Rousseau, the European small-cap fund manager at Edmond de Rothschild Asset Management, told Bloomberg that he recently bought shares in Italy's ICoP, which specializes in underground construction such as pipelines, tunnels, and metro stations. “The tipping point for me was clearly this trade war,” he said. “Small caps are a very domestic and cyclical asset class.”

Small-cap equities are also benefiting from lower interest rates in Europe and cheaper valuations following years of underperformance, Bloomberg points out. They generally trade at a 20% premium to larger peers, according to data compiled by Bloomberg; however, in the past two years, they have traded at a relative discount.

The European small-cap rally is only getting started, according to asset managers surveyed by Bloomberg. At the same time, Bloomberg cautions investors about risks tied to ongoing trade policy instability and the war in Ukraine.

“The pressure is on governments to try to create a more growth oriented-environment within Europe,” said Hywel Franklin, head of European equities at Mirabaud Asset Management. “Uncertainty hasn’t completely receded.”

Those who did not have faith in the early stages of the small-cap rally still have scope to get involved if domestic economic growth picks up, Bloomberg argues. Earnings estimates also suggest stronger relative growth in European small caps over their larger peers, which is yet to be reflected in share prices.

The trend of outperforming European small caps is poised to continue, Sharon Bell, senior strategist at Goldman Sachs, told CNBC in late July. The outperformance is due to a weak dollar and expectations of an improving regional economy, she explained. Since the beginning of the year, the euro has appreciated 12.7% against the dollar – this is important since small caps tend to be more domestic.

Small and mid-sized European companies represent a compelling investment opportunity over the next one to three years, analyst Aldiyar Anuarbekov wrote in a column for Oninvest. Currency fluctuations, trade tensions, and evolving central bank policies have created a rare set of conditions in which small-cap companies are gaining an edge.

Meanwhile, BofA's July European Fund Manager Survey found that a net 44% of respondents expect small caps to outperform large caps over the next 12 months. CNBC called this a "massive pivot," as just one month earlier, 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.