Donald Trump’s notorious election slogan has long been ‘Make America Great Again’ but his policies since becoming US president for the second time are more likely to ‘Make Europe Great Again’, says Newton’s Tom Wilson.

He argues that Trump’s policies and stance, particularly on trade and defence, have been instrumental in not only spurring Germany to bolster its infrastructure, but also in enhancing the wider European economy, and boosting defence spending and domestic manufacturing.

Wilson is not sure that Germany’s €500bn infrastructure plan, as part of a wider €1 trillion spending plan², would have happened with such urgency and pace had Trump not chosen to follow certain policies.

“All Trump’s policies appear to have the potential to stimulate economic growth in Europe, so the biggest beneficiary, bizarrely, could be Europe,” says Wilson.  “A lot of money is going to have to flow in Europe which is likely to stimulate the economy. Compare this with the US where some tariffs could be repressive on the consumer and, on a relative basis, Europe is presenting opportunities.”

Indeed, a look at the performance of the MSCI Europe index versus the S&P 500 index since Trump’s inauguration, shows the former has outperformed the latter over this period.
 

Why small cap?

Wilson adds European small cap companies, which have had a tricky few years, could experience a change in fortune if Europe is no longer relying on the US for economic growth and defence.

He notes in the decade leading up to 2020, the S&P Eurozone Small Cap index outperformed the larger cap MSCI EAFE index³. One reason, he suggests, is small cap companies are nimbler and can adapt to changing economic and market conditions quicker than large caps.

Similarly, small caps tend to be more entrepreneurial in nature, Wilson believes, with management teams having a high degree of equity ownership which means they care about making the right decisions for that company.

But the years since 2020 were less kind to small caps, notes Wilson, with the MSCI EAFE index outperforming the S&P Eurozone Small Cap index over that period⁴. The pandemic-induced hit to supply chains and spike in inflation saw the market gravitate towards larger companies, particularly those exposed to technology, which left small caps behind.

Wilson also suggests that a raft of regulatory change in Europe over the past decade has held it back when competing on the global stage. But the Draghi report published in September 2024⁵ and Europe’s ‘Competitive Compass’⁶ are positive moves towards cutting some of the red tape to help the region become more competitive.

Other positive signs include the German government’s €1 trillion spending plan which could be beneficial for wider European companies. “The fact this could be reasonably quickly mobilised shows there is appetite for change – and that Europe is taking control of its destiny,” says Wilson.

Other macro drivers include Europe being a key player on the global GDP stage, representing 18% of the total⁷. Inflation in the bloc has come down and unemployment is low. “These are really powerful macroeconomic drivers,” adds Wilson.

He also argues the S&P Eurozone Small Cap index is less concentrated compared with the S&P 500. The former index has less than 15% weight in technology and communication services sector whereas the latter index has more than 40%⁸.

Added to this, Wilson flags that European small caps are trading at the largest discount in 12 years versus the S&P 500 on a forward-looking price to earnings (P/E) basis⁹.

“The businesses are not in any way inferior; we have some fantastic businesses in Europe and I'm really excited about the small cap space. I think they have been unfairly treated when it comes to a valuation, but that's the opportunity,” he concludes.

The value of investments can fall. Investors may not get back the amount invested.