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Since Liberation Day in April, global small cap companies have surged ahead of their large cap peers.

While the rally has caught some off guard, we believe it reflects deeper structural shifts that could support the asset class’s continued outperformance.

A global rally

Small caps have outpaced large caps across nearly every major region. In the UK, the MSCI UK Smaller Cap Index returned 12.7% since the start of April, compared to just 3.0% for the broader MSCI UK Index.1,2 Europe exhibited a similar pattern, with small caps rising 9.9% compared to 2.7% for large caps.3 Asia ex-Japan small caps delivered a striking 18.1%, outperforming their large-cap counterparts by 5.4 percentage points at 12.7%.3

Even in the US, where mega-cap tech stocks dominate headlines, small caps held their own. The Russell 2000 rose 10.8%, nearly matching the S&P 500’s 10.9% gain.4,5

More than a short-term bounce

Small cap strength isn’t new. In Asia ex-Japan, small caps have outperformed over five and ten years. In Europe, the MSCI Europe Small Cap Index has delivered an annualized return of 5.9% over 15 years, compared to just 1.8% for the broader index.6,7

Why this trend has legs

We believe several factors support the case for continued small-cap outperformance:

  • Diversification: Small caps offer exposure to different economic drivers, especially outside the US. With US large caps heavily owned and policy uncertainty rising, geographic diversification is becoming more attractive.
  • Domestic focus: Smaller companies tend to be more locally oriented, making them less vulnerable to global trade tensions and currency swings.
  • Favorable policy backdrop: Interest rate cuts in developed markets typically benefit small caps more than large caps. Meanwhile, corporate reforms in Japan and fiscal stimulus in Germany are boosting local economic growth prospects.
  • Valuations: Small caps are trading at their widest discount to large caps in over two decades – an opportunity that hasn’t gone unnoticed by value-focused investors.
  • Earnings potential: Forecast earnings growth for the MSCI ACWI Small Cap Index is currently higher than for large-cap indices.8,9

What this could mean for investors

The case for small caps is building. Investors seeking to diversify away from US mega-caps may find compelling opportunities in smaller companies across the US, Europe, and Asia ex-Japan. Active managers with local expertise could be well-positioned to navigate this space.

Final thoughts

President Trump’s Liberation Day may have sparked the latest rally, but we believe the forces driving small cap outperformance run deeper. With attractive valuations, improving fundamentals, and a supportive macro backdrop, global small caps could be entering a new phase of leadership. For investors, it may be time to think small to go big.

Endnotes

1 MSCI UK Smaller Cap Index, July 2025.
2 MSCI UK Index, July 2025.
3 Morningstar, 7/9/2010–7/8/2025.
4 Russell 2000 Index, July 2025.
5 S&P 500 Index, July 2025.
6 MSCI Europe Small Cap Index, July 2025.
7 MSCI Europe Index, July 2025.
8 MSCI ACWI ex-USA Small-Cap Index, July 2025.
9 MSCI ACWI ex-USA Large-Cap Index, July 2025.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.

AA-230725-196529-1

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