Europe’s small-cap stocks are enjoying a rare moment in the sun, as investors scramble to shield portfolios from the U.S. administration’s latest trade offensive and a surging euro.
With President Donald Trump vowing to impose a 30% tariff on European Union imports from 1 August — pending last-ditch negotiations that could halve the levy — money is moving rapidly into the region’s domestically oriented small- and mid-cap shares. The logic is simple: these firms earn most of their revenues at home, leaving them less exposed to cross-border tariff pain and currency volatility than their multinational peers.
According to the latest data, the STOXX Europe Small Cap index is up 9% year-to-date, with mid-caps climbing even further, at 11%. In contrast, large-cap indices — heavily populated by exporters — have managed only a 7% gain as investors fret over profit margins. The sharp divergence accelerated in July after Trump’s tariff declaration on 12 July and as the euro rallied 12% against the dollar, adding to the headwinds for Europe’s global brands.
The market’s rotation away from giants like Puma, Traton, and ASML has been stark. Puma shares tumbled 20% on 25 July after the sportswear company warned of a likely full-year operating loss, blaming both tariffs and the stronger euro for eroding profits. Truckmaker Traton, the Volkswagen subsidiary, slashed its 2025 outlook, citing U.S. uncertainty, and saw its shares fall nearly 10%. Technology exporters, including chip equipment leader ASML, have also flagged revenue risks linked to both trade and FX swings.
Automakers face particular pressure, with European car exports to the U.S. already subject to 27.5% tariffs — a figure that could rise further if the Trump administration’s proposed 30% rate comes into force. Volvo, for example, has indicated its ES90 model may soon be unprofitable in the American market.
The policy environment is also feeding the flight to smaller firms. The European Central Bank held its deposit rate at 2% on 24 July, pausing after a series of hikes and signalling a more supportive stance for domestic demand. At the same time, Germany — the EU’s largest economy — is preparing new fiscal measures to cushion local businesses against global shocks, further boosting the case for SMIDs.
Meanwhile, fund flow data show renewed appetite for small- and mid-caps. Significant inflows into these segments were seen in July, with investors seeking alternatives as large-cap earnings outlooks darken. Global funds started rotating away from exporters mid-month, reflecting mounting uncertainty over trade policy.
The fate of this rotation now hinges on the outcome of U.S.-EU trade talks. Rumours of a compromise — potentially cutting tariffs to 15% — have driven wild swings in sectors most exposed to American sales. On 23 July, automakers briefly rallied on optimism that a deal was close, but volatility remains high as the 1 August deadline nears.
For Europe’s small caps, the recent surge comes after years of underperformance and discounted valuations. Analysts note that, even after this year’s outperformance, many remain below historical averages relative to large caps, suggesting further upside if domestic earnings prove resilient.
The coming weeks will determine whether the SMID outperformance is a durable re-rating or simply a tactical hideout until tariff smoke clears. Should negotiators reach a deal that meaningfully reduces the threat, the recent investor rotation could quickly reverse. But if the full tariff package arrives as planned — or if trade tensions worsen — the gap between Europe’s minnows and giants may only widen further.
