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This year, Europe’s smaller stocks have outpaced their US counterparts as investors anticipate an economic revival, while avoiding companies heavily affected by Donald Trump’s trade conflicts.

In Europe, investors have gravitated towards once-overlooked small- and medium-sized companies, attracted by lower interest rates and the anticipated growth benefits from Germany’s landmark €1tn stimulus initiative.

In contrast, Wall Street’s recovery from the sharp drop following President Trump’s broad tariff announcement in early April has primarily been driven by the country’s “megacap” tech companies. Smaller stocks, which generally rely more on domestic economic conditions, have lagged behind.

This has meant that this year’s divergence between European and US equities has been especially pronounced among small- and mid-cap stocks.

Since the beginning of 2025, the MSCI Europe small- and mid-cap index has risen 10.7 per cent, while the same index for the US has fallen 2.6 per cent. 

Equivalent indices for larger companies are up 7 per cent in Europe and 1.2 per cent in the US.

“We’ve seen an increased interest, particularly from US investors, in European mid-cap names,” said Aleksander Peterc, head of small- and mid-cap equity research at Bernstein. Clients are “looking for high quality, overlooked stocks, preferably exposed to European infrastructure spending and the German ‘bazooka’”, he added.

Falling borrowing costs have also helped. The European Central Bank has halved interest rates from a peak of 4 per cent in June following the latest cut on Thursday. That contrasts with the US, where Federal Reserve policymakers have moved more slowly and indicated they want to wait and see the impact of Trump’s tariffs on inflation before reducing rates further.

“We used to have US mid-caps [in our portfolio], but . . . US mid-caps work when you have the Fed easing and growth upgrades. We’re seeing none of these in the US,” said George Efstathopoulos, multi asset portfolio manager at Fidelity International.

In Europe, smaller equities have underperformed larger ones by 19 per cent since the start of 2022, but that gap has started to narrow this year.

But a relative return of optimism around growth, along with concerns that the trade war will hurt larger export-focused stocks, have helped to narrow that gap in 2025.

“Post-liberation day we bought the weakness in German mid-caps and Greek equities, which has been a “very strong performing story”, Efstathopoulos said.

“We are playing the domestic revenue generation theme in a world of trade disruption,” he added.

Some analysts also say that smaller European firms have benefited from a renewed enthusiasm for stockpicking strategies, as investors try to pick winners and losers from Trump’s trade onslaught.

“I am speaking to people who would typically only invest passively around the world, and when they’re looking at Europe, they’re specifically looking at active allocations,” said Gerry Fowler, head of European equity strategy at UBS. “They want someone who understands that the prospects of companies in Europe differ quite wildly in the current context of tariffs, currency movements, stimulus plans.”

Fowler added that it was “very hard to make a case for US small-caps”, largely due to fears about the effect of Trump’s policymaking on the US economy.