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This year’s European stocks competed ahead of the US peers this year as investors bet on an economic revival while trying to avoid companies most exposed to Donald Trump’s trade war.
Investors are gathering in previously unloved small businesses in Europe, drawn by low interest rates and promises of growth from Germany’s historic 10 euro stimulus plan.
The rebound from the sharp decline on Wall Street is supported by the country’s “Mega Cup” technology stocks after President Trump announced he had wiped out tariffs in early April. Small stocks that tend to be linked by the wealth of the domestic economy are left behind.
This means that differences between European and US stocks this year are particularly pronounced between small and intermediate stocks.
Since the beginning of 2025, the MSCI Europe Smmall and Mid-Cap indexes have increased by 10.7%, while the same US index has dropped by 2.6%.
Comparable indexes for large companies are up 7% in Europe and 1.2% in the US.
“We are particularly interested in the European mid-cap name from US investors,” says Alexander Peter, director of small and intermediate equity research at Bernstein. The client “looks for high quality, overlooked inventory, and hopefully exposed to European infrastructure spending and German ‘bazookas’,” he added.
The lower borrowing costs were also helpful. The European Central Bank has halved interest rates from its 4% peak in June, following its latest cut on Thursday. That contrasts with the US, as Federal Reserve policymakers move more slowly and show they want to wait, seeing the impact of Trump’s tariffs on inflation will cut even further.
“We had midcaps (in our portfolio) and the US midcap was working when there was Fed mitigation and growth upgrades. We don’t see any of these in the US.”
In Europe, smaller stocks have not performed 19% of their shares since their launch in 2022, but this year the gap has begun to narrow.
But the relative gains of growth optimism, along with concerns that the trade war would hurt stocks focused on bigger exports, helped narrow that gap in 2025.
“The day after the liberation we bought the weaknesses of German midcap and Greek stocks. This was a ‘very strong performance story’.”
“We play domestic revenue generation themes in a world of trade turmoil,” he added.
Some analysts also say small European companies are benefiting from new enthusiasm for inventory strategies as investors select winners and losers from the Trump trade onslaught.
“I usually talk to people who just passively invest around the world. When they look at Europe, they see an active and aggressive allocation,” said Jerry Fowler, head of UBS’s European equity strategy. “They want people to understand that the outlook for European companies is very different in the current context of tariffs, currency movements and stimulus plans.”
Fowler added that “it’s very difficult to argue for us for our sakes,” primarily due to fears about the impact of Trump’s policy decisions on the US economy.
