European Small Stocks Outpace US Peers Amid Trump Trade War

Strategic Insights -

Investors have turned to small and medium-sized European companies, drawn by lower interest rates and the promise of a growth boost from Germany's €1tn stimulus plan. This has led to a divergence between European and US equities, with smaller stocks in Europe outperforming their US counterparts. Since the beginning of 2025, the MSCI Europe small and mid-cap index has risen 10.7 percent, while the same index for the US has fallen 2.6 percent.

Key Takeaways:

  • Investors have flocked to European small and medium-sized companies, driven by lower interest rates and the German stimulus plan, resulting in a 10.7 percent rise in the MSCI Europe small and mid-cap index since 2025.
  • The divergence between European and US equities has been pronounced among small- and midcap stocks, with the MSCI Europe small and mid-cap index outperforming the US equivalent by 13.3 percentage points since the beginning of 2025.
  • The European Central Bank has halved interest rates from a peak of 4 percent in June, while Federal Reserve policymakers have moved more slowly and indicated that they want to wait and see the impact of Trump's tariffs before reducing rates further.
  • Fidelity International's George Efstathopoulos attributes the performance of European small stocks to a relative return of optimism around growth and concerns that the trade war will hurt larger export-focused stocks.
  • Some analysts say that smaller European companies have benefited from a renewed enthusiasm for stockpicking strategies, as investors try to pick winners and losers from Trump's trade onslaught.
  • The performance of European small stocks has been driven by a strong performing story in German mid-caps and Greek equities, which have been bought into weakness by investors.

Statistics:

  • MSCI Europe small and mid-cap index rise: 10.7 per cent since the beginning of 2025
  • MSCI US small and mid-cap index fall: 2.6 per cent since the beginning of 2025
  • Difference in total return between MSCI Europe large cap and small/mid-cap indices: 10.9 per cent
  • European Central Bank's interest rate cut: 2 percentage points since June
  • Federal Reserve policymakers' indication of future rate cuts: "wait and see" approach to inflation impact

Sources:

  • "Market sinks after Trump announces tariffs on $360 bn of Chinese goods" by Emily Herbert -- London, Financial Times (April 2025)
  • "European small stocks racing ahead of US peers as investors bet on economic resurgence" by The Financial Times (February 2025)
  • MSCI Europe small and mid-cap index data
  • European Central Bank interest rate data
  • Federal Reserve policymakers' statements on interest rates