European Small-Cap Stocks Outshine Large Caps in 2025
European small-cap stocks have enjoyed a remarkable surge this year, outperforming their larger counterparts and drawing the attention of investors worldwide. According to Sharon Bell, a senior strategist at Goldman Sachs, this trend is likely to persist amid a favorable economic backdrop and currency dynamics.
The Currency Factor: Euro Strength Bolsters Domestic Firms
Unlike in the United States—where mega-cap stocks dominate gains—Europe’s small caps have thrived thanks in large part to the euro’s appreciation against the dollar. Bell explained on CNBC's Squawk Box Europe that many European small-cap companies primarily generate revenues within the eurozone, shielding them from the currency headwinds that large multinational firms face. Conversely, large-cap European companies, often dollar earners, have had their euro earnings compressed, creating a challenging environment.
Market Performance Highlights
- MSCI Europe Small Cap Index increased approximately 13% year-to-date, reflecting gains from diverse firms including British real estate platform Rightmove and Swiss firm PSP Swiss Property.
- Germany’s SDAX Index, comprising 70 small caps, surged close to 32% in 2025.
- The broader Stoxx 600 rose 7.9%, while the U.S. S&P 500 gained around 7% in the same period.
Valuation and M&A: A Powerful Incentive
Another cornerstone supporting small-cap appeal is valuation. Bell highlights that while large and mega-cap stocks have reached all-time highs and appear stretched, small caps remain relatively inexpensive. This valuation gap transforms smaller firms into attractive targets for mergers and acquisitions (M&A).
Global M&A activity presents an intriguing paradox: although deal volumes declined by 9% globally and 6% in the EMEA region in the first half of 2025, total deal values rose by 15% and 7% respectively. PwC attributes part of the volume drop to fewer megadeals in the UK compared to 2024, but the higher deal values hint at growing interest in quality, value-oriented smaller companies.
Fund Manager Sentiment Reflects Optimism
Supporting this momentum is data from Bank of America’s July European Fund Manager Survey, which reveals a dramatic shift in investor sentiment. A net 44% of fund managers now expect small caps to outperform large caps over the next 12 months, up sharply from just 7% the previous month. This trend underscores a renewed appetite for cyclical and value stocks, especially in the small-cap segment.
Expert Perspective: Nuanced Investment Approaches Needed
While enthusiasm builds, experts warn against a one-size-fits-all approach. Christopher Hart, managing the $274 million Global Equity Fund at Boston Partners, expressed cautious agreement with the bullish outlook. He emphasized the importance of identifying the "sweet spot" — small caps that combine attractive valuations with solid growth trajectories — rather than viewing all small caps as uniform investment opportunities.
What This Means for Investors
The robust performance of European small caps in 2025 reflects broader shifts in the global economic and currency landscape. For American investors, the euro’s strength and Europe’s domestic economic recovery offer an alternative avenue for growth beyond the mega-cap giants that dominate U.S. markets.
Moreover, with rising M&A activity potentially lifting valuations further, small caps present promising, yet selective, opportunities. Investors and fund managers alike must employ thoughtful strategies to navigate sector-specific risks and identify companies poised to benefit from these macro trends.
Underreported Dimensions and Critical Questions
- How sustainable is the euro’s strength, and could currency volatility alter small-cap fortunes?
- To what extent will geopolitical and inflationary pressures in Europe affect small businesses compared to large multinationals?
- What sectors within the small-cap universe are driving growth, and are there emerging themes such as green energy or technology innovation?
Editor’s Note
The remarkable rise of European small-cap stocks in 2025 challenges conventional wisdom about market leadership dominated by mega-cap titans. With currency dynamics, economic recovery, and M&A activity creating a fertile environment, small caps deserve renewed investor attention. However, as experts underscore, discerning between diverse opportunities within this segment is essential. Future volatility, sector shifts, and global economic forces will test this momentum, making thoughtful analysis and flexible strategies more critical than ever for investors eyeing the European small-cap space.
