European small caps could have further to run
European small-cap stocks have outperformed this year and are poised to continue their winning streak, according to a senior Goldman Sachs strategist. Speaking to CNBC’s “Squawk Box Europe” on Thursday, Sharon Bell said a weak dollar and expectations of an improving regional economy were giving “a little bit of a kicker to small caps.” “So small caps in Europe have outperformed this year, which is very different from the U.S. … [where] it’s the mega caps that have done very well,” she said. “Small caps tend to be more domestic — they tend to be euro earners in Europe, and the euro has done well. If you’re a dollar earner, you’re a big-cap international company. Translating that back into euros when the euro has been so strong [will have] been painful for you this year. So that’s one reason small caps have done well.” MSCI’s Europe Small Cap Index, home to stocks from across the region including British real estate platform Rightmove and Swiss real estate firm PSP Swiss Property , has gained around 13% since the beginning of the year. The German SDAX index, comprised of 70 small cap companies, has gained close to 32% so far this year. In comparison, the pan-European Stoxx 600 is up 7.9% in the year to date, while the U.S. S & P 500 index has added around 7%. Bell also noted that part of small cap stocks’ appeal right now is that they remain cheap relative to large and mega-cap companies. “The large caps [are] at all at all-time highs and extremely stretched in valuation terms,” she told CNBC. “And of course, when you get a little bit cheaper versus the large caps, you become big targets. And we have seen a pick-up in M & A [which] I do think will continue to improve next year, and in the end, all small caps get bid up when you start seeing people’s expectations for M & A improve.” According to data from professional services giant PwC, global M & A volumes fell 9% year-on-year in the first half of 2025, but deal values were up by 15%. In the EMEA region, volumes and values were down 6% and 7%, respectively, compared to the first half of 2024. PwC attributed this largely to a drop in the number of megadeals in the U.K. compared with the previous year. Bell isn’t alone in seeing opportunities among small European firms. Bank of America’s July European Fund Manager Survey found that a net 44% of respondents expect small caps to outperform large caps over the next 12 months. The regional survey included responses from fund managers who collectively manage assets worth $172 billion. That view marks a massive pivot in position on small cap stocks. Just one month earlier, only 7% of fund managers told BoA they believed small caps would outperform. BoA strategists said in the report on the survey findings that there was currently “a clear preference for European cyclicals, value [and] small caps stocks.” Christopher Hart, a fund manager at Boston Partners, told CNBC on Friday that, while he didn’t disagree with the pro-small cap view “from an idiosyncratic perspective,” it was important to take a considered approach to investing in the space. However, Hart — who manages Boston Partners’ $274 million Global Equity Fund — did note that there was “a sweet spot” among small caps, with some smaller companies offering both value and a strong growth trajectory. He urged not to treat small-caps as one.
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