European small-caps outshine US rivals as investors bet on growth revival 

European small- and mid-cap stocks are outperforming their U.S. counterparts in 2025, driven by investor optimism about Europe’s economic recovery and strategic avoidance of U.S. trade policy risks. The MSCI Europe Small and Mid Cap Index has surged 10.7% year-to-date, while the U.S. equivalent has declined by 2.6%.

Key factors contributing to this trend include Germany’s expansive €1 trillion stimulus package and the European Central Bank’s aggressive interest rate cuts, which have halved borrowing costs from a 4% peak. These measures have bolstered investor confidence in European markets.

In contrast, U.S. small-cap equities have lagged due to the absence of Federal Reserve rate cuts and increased economic uncertainty stemming from trade policies. Analysts also note a shift toward active stock picking in Europe, as investors seek to identify favorable firms amid policy volatility.

Overall, European small-caps are gaining favor as safer and more promising investments in a turbulent global trade environment.