Mid-Year 2026 Investment View: European Equities

Summary

• The European small- and mid-cap (SMID) valuation case remains intact, with H1 volatility reinforcing the importance of resilience and selectivity.

• Earnings impacts have been highly stock-specific, with many companies proving more resilient than macro headlines suggest.

• We see opportunities in domestic, less cyclical and high-visibility businesses, as well as companies where expectations are already cautious.

• The market’s focus remains too narrow, creating opportunities beyond the most obvious AI and technology beneficiaries.

What did H1 change for European SMID? 

Despite the headline volatility, the first half of 2026 did not change the valuation case for European SMID. In our view, the case is just as strong as it was at the start of the year. European SMID entered the period as an overlooked and under-owned part of the market, and H1 has done little to undermine this. If anything, it has provided further evidence that small caps are more resilient than many investors expected.

The Iran conflict has affected earnings expectations, but the impact has been highly stock-specific. Higher input costs, weaker consumer sentiment in some areas, decision-making delays and market volatility have pressured some names. However, company feedback has been more balanced than the macro headlines suggest. Agile businesses have moved quickly to secure supply chains and reprice, while more conservative managers have built buffer stock to protect delivery commitments. In many cases, activity levels have been more normal than feared.

H1 also reinforced the strength of demand linked to AI and data-centre investment. While the initial beneficiaries have been relatively concentrated, we believe the opportunity set is likely to broaden over time. This matters for European SMID because the opportunity is not limited to the most obvious mega-cap technology beneficiaries.

The period of heightened geopolitical stress also triggered a more risk-off market environment, including a retreat towards the US dollar. However, as hostilities decrease, we would expect appetite for risk assets, and for Europe, to recover. 

What remains investable across scenarios? 

The European SMID market continues to offer a broad range of investable opportunities, but the strongest case is for companies that can perform across different macro outcomes. Here we would point to businesses that are more domestic, less cyclical, or have high visibility on revenues and earnings. 

We are also focused on companies where expectations are already cautious. Many of the businesses we meet have a high degree of scepticism embedded in their share prices, which means they do not need a dramatic improvement in the macro environment to perform well. 

This is also where the structure of the European SMID market matters. Many of the most interesting companies are overlooked by global investors and sit beyond the large index and ETF exposures that dominate many portfolios. That creates opportunities for active managers willing to look beyond the obvious parts of the market.

Finally, there are companies that can benefit from the current disruption. Some have direct energy exposure, while others are using the environment to gain share from competitors that are less able to meet clients’ needs. 

What is the market mispricing? 

We think the biggest mispricing is that investors are taking too narrow a view. Time horizons have become very short, and AI and technology investments are being treated as the only themes that matter. We think that is creating two opportunities within European SMID.

The first is within AI itself. Even in the area currently attracting the most attention, we see a broader set of beneficiaries than many investors recognise. Some companies can use technology to improve service or reduce costs, while others can gain share through innovation. In periods of significant technological change, smaller and more agile companies can prove well placed to respond quickly.

The second opportunity is broader. Many companies in other parts of the market have been ignored, despite having attractive growth opportunities of their own. For us, the underappreciated opportunity is not a single sector or theme, but the breadth of companies in European SMID that are being overlooked because the market’s attention has become so concentrated.

Where are you cautious?

We are cautious in areas where expectations are very high and valuations leave little room for disappointment. Some of the hottest parts of the market are pricing in a great deal of future growth, and history shows us that over the long term the price paid really matters. We remain committed to valuation discipline and avoiding areas where too much future success is already reflected in the share price.

How are you positioned, and where would you add if volatility creates better entry points?

We are positioned in a balanced way across different types of opportunity. The portfolio includes strongly growing companies, businesses where we see deep value and significant scepticism already embedded in the share price, and more dependable companies with very high visibility on revenues and earnings.

That balance matters in an environment where the range of possible outcomes remains wide. As scenarios unfold and the geopolitical backdrop changes, we will continue to evolve the portfolio. If volatility creates better entry points, we would expect to add selectively where we see attractive long-term upside, strong execution and valuations that do not fully reflect the opportunity. We see potential across many sectors, but the key will remain stock selection rather than making a broad call on any single part of the market.

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