European Small Caps Poised for Rebound After Tough Years

Analysts see favorable conditions for small and mid-cap companies in Europe to outperform large caps in 2026

Published on Feb. 8, 2026

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After a period of underperformance, European small and mid-cap stocks are expected to rebound in 2026 as macroeconomic conditions become more favorable. Factors like lower interest rates, easing inflation, and a more stable political and economic climate in Europe are expected to benefit smaller companies that were hit harder by recent economic headwinds. Analysts predict better earnings growth for small caps compared to large caps in the coming year, and a potential rerating of valuations that have remained depressed.

Why it matters

European small and mid-cap stocks have historically been among the best-performing assets of the 21st century, but have lagged in recent years due to their greater sensitivity to factors like inflation, energy costs, and higher interest rates. A resurgence in small cap performance could signal a broader recovery in the European economy and provide opportunities for investors.

The details

European small and mid-caps slightly outperformed large caps in 2025, but valuations remain depressed compared to larger companies. This valuation gap is attributed to smaller firms being more vulnerable to recent macroeconomic challenges. However, analysts see several positive signals on the horizon, including lower interest rates benefiting small caps, easing inflation pressures, and a return to growth in key European economies like Germany. Smaller companies may also benefit from European policy priorities around reindustrialization and regulatory simplification. Overall, the current discount on small cap valuations could precede a new cycle of outperformance.

  • In 2025, the Euro Stoxx Small index slightly outperformed the Stoxx 50 large-cap index.
  • As of December 31, 2025, the valuation gap (EV/EBITDA) between MSCI Europe stocks and MSCI Europe Small Caps was still significant.

The players

Raphaël Girault

A specialist in European small and mid-cap stocks at MarketScreener, who publishes a monthly report on the sector and the evolution of asset managers' portfolios.

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What’s next

Analysts will be closely watching for signs of a rerating in European small cap valuations in the coming year, which could signal the start of a new outperformance cycle for the asset class.

The takeaway

After a period of underperformance, European small and mid-cap stocks appear poised for a comeback in 2026 as macroeconomic conditions become more favorable. Smaller companies that were hit harder by recent economic headwinds may benefit from lower interest rates, easing inflation, and a more stable political and economic climate in Europe.