European Mid-Cap Stocks: Why Investors Are Shifting Away From US Equities
The investment landscape is undergoing a quiet revolution. While Wall Street has largely been buoyed by its tech giants, a surprising trend is unfolding across the Atlantic: European mid-cap stocks are surging, outperforming their US counterparts by a significant margin. Since the beginning of 2025, the MSCI Europe small- and mid-cap index has risen 10.7%, while the US equivalent has fallen 2.6%. What’s driving this divergence, and what does it mean for investors?
The Allure of the European ‘Bazooka’
A key factor fueling this shift is the economic resurgence in Europe, bolstered by substantial stimulus measures, particularly Germany’s €1 trillion plan – dubbed the “bazooka” by some analysts. Lower interest rates, courtesy of the European Central Bank halving rates from a peak of 4%, are further sweetening the deal. Investors are flocking to previously overlooked small- and medium-sized companies, seeking opportunities in infrastructure spending and domestic growth. This contrasts sharply with the US, where the Federal Reserve’s more cautious approach and the looming uncertainty of Trump-era tariffs are creating headwinds for smaller businesses.
“We’ve seen an increased interest, particularly from US investors, in European mid-cap names,” confirms Aleksander Peterc, head of small- and mid-cap equity research at Bernstein. “Clients are looking for high quality, overlooked stocks, preferably exposed to European infrastructure spending and the German ‘bazooka’.”
The Impact of Trade Wars and Monetary Policy
The trade war initiated by President Trump is playing a crucial role in this transatlantic divide. Larger, export-focused US companies are particularly vulnerable to tariffs, while smaller European firms, often more focused on domestic revenue, are comparatively shielded. This has led investors to reassess their portfolios, seeking refuge in the relative stability of the European market.
George Efstathopoulos, multi asset portfolio manager at Fidelity International, explains the shift: “We used to have US mid-caps [in our portfolio] but… US mid-caps work when you have the Fed easing and growth upgrades. We’re seeing none of these in the US.” He adds that his team has been actively investing in German mid-caps and Greek equities, capitalizing on the “domestic revenue generation theme in a world of trade disruption.”
The Rise of Active Stockpicking in Europe
Beyond macroeconomic factors, a renewed enthusiasm for active stockpicking is contributing to the European mid-cap rally. Investors are increasingly recognizing that a one-size-fits-all approach is insufficient in navigating the complexities of the current trade landscape. They’re seeking fund managers who can identify winners and losers in a rapidly changing environment.
Gerry Fowler, head of European equity strategy at UBS, notes, “I am speaking to people who would typically only invest passively around the world, and when they’re looking at Europe, they’re specifically looking at active allocations. They want someone who understands that the prospects of companies in Europe differ quite wildly in the current context of tariffs, currency movements, stimulus plans.”
This demand for specialized expertise is creating opportunities for skilled fund managers and driving capital towards European mid-cap stocks.
Why US Small-Caps Struggle
The situation in the US is markedly different. Fears surrounding the impact of Trump’s policies on the US economy, coupled with a lack of monetary easing, are making it difficult to build a compelling case for US small-caps. The domestic-focused nature of these companies leaves them particularly vulnerable to any slowdown in the US economy.
Looking Ahead: What’s Next for European Mid-Caps?
The current trend suggests that the divergence between European and US equities, particularly in the mid-cap space, is likely to continue. The combination of supportive monetary policy, robust stimulus measures, and a relatively sheltered position from the trade war positions European mid-caps for continued growth. However, investors should remain vigilant.
Several factors could disrupt this trajectory. A sudden escalation of the trade war, a significant slowdown in the German economy, or an unexpected shift in the European Central Bank’s monetary policy could all dampen investor enthusiasm. Furthermore, the potential for political instability in Europe remains a risk.
Despite these potential headwinds, the underlying fundamentals supporting European mid-caps remain strong. The focus on domestic revenue generation, coupled with the benefits of infrastructure spending, provides a solid foundation for future growth.
“The key to success in European mid-caps lies in identifying companies that are well-positioned to benefit from the structural changes underway – those that are exposed to infrastructure spending, domestic demand, and the broader economic recovery.” – Aleksander Peterc, Bernstein
Frequently Asked Questions
Q: What exactly are mid-cap stocks?
A: Mid-cap stocks generally refer to companies with a market capitalization between $2 billion and $10 billion. They often offer a balance between the growth potential of small-cap stocks and the stability of large-cap stocks.
Q: Is it too late to invest in European mid-caps?
A: While the recent gains have been substantial, many analysts believe there is still room for growth, particularly in specific sectors and countries. However, it’s crucial to conduct thorough research and consider your own risk tolerance.
Q: How can I gain exposure to European mid-caps?
A: You can invest in European mid-cap stocks through individual stock purchases, exchange-traded funds (ETFs) focused on European mid-caps, or mutual funds managed by fund managers specializing in this asset class. See our guide on Investing in European ETFs for more information.
Q: What are the biggest risks associated with investing in European mid-caps?
A: Risks include potential political instability in Europe, fluctuations in currency exchange rates, and the possibility of a slowdown in the German economy.
The shift towards European mid-cap stocks represents a compelling investment opportunity. By understanding the underlying drivers of this trend and carefully assessing the risks, investors can position themselves to benefit from the ongoing economic recovery in Europe. What are your thoughts on the future of European equities? Share your insights in the comments below!
