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

• Strong performance: European small caps have gained around 8% so far in 2026.
• Positive outlook: Rising corporate earnings and a more resilient economy are creating a positive environment.
• Growth opportunities: Billions in investments in AI, energy, infrastructure and automation are benefiting many specialized European companies.
• Proven over the long term: The Bellevue Entrepreneur Europe Small Fund generated an average annual net return of 11.7% over 15 years.

European small and mid caps gained around 8% from the beginning of the year through September 20, 2026. Despite the challenging situation in Iran, they performed well and broadly in line with the major European indexes. The rise in oil prices to above USD 100 has led to a modest market correction since August, which we view as an opportunity given the favorable underlying conditions.

Returns were supported by healthy margins and solid earnings growth, as demonstrated by the second-quarter reporting season. Since the beginning of the year, earnings expectations for European companies have been revised upward by around 6%. Growth of 14% is now expected for 2026, well above the long-term average. With the exception of the automotive industry and the consumer discretionary sector, all sectors reported positive sales and earnings growth.

European economic data has recently surprised to the upside. Manufacturing PMIs are improving, while economic activity remains resilient. GDP growth forecasts have been raised for both the eurozone and Germany. This provides a favorable backdrop for the third-quarter reporting season beginning in October, particularly for European small and mid caps.

Europe is at the beginning of a long-term investment cycle. AI, energy security and geopolitical realignment are driving private and public investment. The small- and mid-cap segment, with its many specialized companies, should be particularly well positioned to benefit.

From an investor perspective, the following points remain key:

• AI investments extend far beyond the technology sector. Rising energy demand and the necessary expansion of infrastructure are creating opportunities for less obvious beneficiaries.
• The new market regime is characterized by higher real interest rates, greater volatility and increasing government intervention. At the same time, the reshoring of supply chains and infrastructure investments are increasing capital intensity and financing costs.
• Given the level of market concentration, particularly within the broad AI ecosystem, active stock selection, balanced diversification and consistent valuation discipline are key.
• European industrial and technology companies as well as real assets from the «Old Economy» are likely to benefit.

Industrials account for around 30% of the European small- and mid-cap segment. They benefit both from the improving economic environment and from structural trends such as electrification, AI infrastructure, energy efficiency, industrial automation and the reshoring of production capacity.

The resulting demand benefits highly specialized companies that are leaders in their niches, have pricing power and offer growth prospects beyond individual economic cycles. Andritz, Nexans and Nordex, for example, are benefiting from rising demand in specialized end markets such as hydropower, cable systems and onshore wind energy.

The Bellevue Entrepreneur Europe Small Fund focuses on European small and mid caps, particularly owner-managed companies. Its investment universe comprises more than 2000 stocks, most of which receive limited analyst coverage.

The fund only invests in companies that trade at a significant discount to their estimated intrinsic value. This provides upside potential and a margin of safety. The approach is style-agnostic and includes value, GARP and growth companies, provided their fundamentals justify the price.

Over its 15-year track record, the Bellevue Entrepreneur Europe Small Fund generated an annualized net return of 11.7%, outperforming both its small- and mid-cap benchmark and the STOXX Europe 600 Total Return Index.