European small and mid caps were not left out of the party in 2025, as the Euro Stoxx Small slightly outperformed the Stoxx 50. In France, the CAC Mid & Small also beat the CAC 40, a first since 2020. Even so, we did not see any catch-up in valuations, as performance was mainly driven by the surge in a handful of stocks (Abivax 1,680%; Nanobiotix: 545%; Exail Technologies: 370%; Exosens: 150%).
Valuations still depressed
A rerating dynamic has indeed been observed in Europe, with the emblematic case of banks, but the minnows have not yet been affected.
Valuation gap (EV/EBITDA) between MSCI Europe stocks and MSCI Europe Small Caps as of 31/12/25 (Source: ODDO BHF)
A discount that can be explained by a macroeconomic environment that has heavily hurt smaller companies. More local and more sensitive to inflation, energy costs and high rates, small caps have been knocked around. They appear to have lost a valuation premium historically justified by their higher growth potential than more mature companies.
Yet some macroeconomic signals suggest the conditions for a rebound are in place.
A favorable rate cycle
First, rates. A low-rate cycle benefits small and mid caps more than giants.
Inflation appears to be under control in Europe. The ECB forecasts inflation below 2% through 2028. At the same time, Washington does not seem unhappy to see a weaker dollar. The US currency is in fact the most used currency in European imports (51% in 2024), ahead of the euro, of course (40%). This phenomenon therefore eases imported inflation and would help remove an additional inflation threat.
This backdrop also supports external growth strategies: acquisitions that are easier to integrate into operations and that lift revenues and margins faster than large-scale M&A.
Better earnings growth
Next, analysts expect better earnings growth than large caps in 2026. Last year, European indices posted strong gains, even though earnings did not rise (-1%). If Europe does not lose its appeal, a trickle-down toward smaller market caps could take place.
An economy with more in the tank
Euro zone growth reached 1.5% in 2025, even before the effects of budgetary aggressiveness in Germany. After two years of recession in 2023 and 2024, Germany is expected to return to sustained growth. In France, the household savings rate hit a record dating back to the 1970s (18.7% in the second quarter of 2025 versus 15.3% before the pandemic). A more stable political and economic climate, notably on the issue of pensions, would certainly help release those funds.
Support from Brussels
Still within the macro-positive thesis, European priorities (in keywords: sovereignty, reindustrialization, regulatory simplification) should help favor companies with a strong domestic footprint. A more favorable macroeconomic climate could quickly create a positive spiral.
In a portfolio, holding these companies also means less exposure to global risks such as tariffs, the damage caused by AI, or dollar volatility.
Finally, according to JPMorgan analysts, the current discount could herald a new cycle of small-cap outperformance, as in the early 2000s.
Performance of the Euro Stoxx Small, the S&P 500 and the Euro Stoxx 50 over the current century
At MarketScreener, Raphaël Girault is the specialist in this field. Each month, a report is published on the site with a status update on the sector and the evolution of asset managers' portfolios.
