Chart of the Week
Since 2018, European small caps have significantly underperformed large caps. By the end of April 2025, they were trading at a record discount of around 20% compared to large caps. This is striking as small caps have historically traded at a premium to large caps.
But in recent months, the tide seems to have turned. After widening its underperformance by nearly 7% against the MSCI Europe (Large Cap index) in January and February, the MSCI Europe Small Cap index made an impressive comeback between early March and early June.
OUR ANALYSIS
Two key factors appear to be driving this turnaround. First, the announcement of Germany’s investment plan in early March-a stimulus package aimed at boosting the German economysparked renewed optimism for European growth. Second, European small caps have been less affected by concerns over U.S. tariffs. Since smaller companies tend to be more domestically focused than large caps, they are less reliant on exports to the United States, insulating them from tariff-related pressures.
Another noteworthy point is the strong earnings growth among eurozone small caps. As of the end of May, earnings growth for small caps was projected at an impressive + 15% for 2025, according to Bloomberg. In contrast, expectations for large-cap earnings growth have been scaled back significantly, dropping to just +2.5% for 2025-down from the +6% forecast at the start of the year.
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Written on 6 june 2025. Opinions subject to change.
See also: Credit markets have wiped out the March-April shock
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