Europe’s small & mid caps: Opportunities remain intact in a new investment era

European small and mid caps remain attractive because improving earnings, resilient economic activity and a long-term capital-expenditure cycle are creating favorable conditions for specialized companies.

• European small and mid caps gained around 8% from the start of 2026 to September 20, broadly matching major European indexes despite the challenging situation in Iran.
• Earnings expectations for European companies have been revised upward by around 6% since the beginning of the year, with 14% growth now expected for 2026; all sectors except automotive and consumer discretionary reported positive sales and earnings growth.
• Improving manufacturing PMIs and higher GDP forecasts for the eurozone and Germany support expectations for a favorable third-quarter reporting season starting in October.
• AI, energy security, geopolitical realignment, supply-chain reshoring and infrastructure spending are driving a European investment cycle that should benefit specialized small and mid-cap companies beyond the technology sector.
• Industrials represent around 30% of the European small- and mid-cap universe, with companies such as Andritz, Nexans and Nordex benefiting from demand for hydropower, cable systems and onshore wind energy.

Takeaway: Investors should focus on niche leaders with pricing power and durable growth, while maintaining diversification, valuation discipline and selectivity because higher real rates, volatility, financing costs and concentration in the AI ecosystem create risks.