European small-cap stocks have outperformed their US counterparts in 2025, driven by investor optimism about an economic resurgence in Europe and a preference to avoid companies heavily exposed to the US-China trade war initiated under former President Donald Trump. The European stock index has surpassed the US stock index by record margins, with fund flows gradually increasing into smaller European companies. This trend has puzzled US investors, who are reassessing European equity valuations. Bank of America notes that small-cap stocks, which have underperformed large-caps for the past 12 years, are currently undervalued and well-positioned to benefit in a stagflationary environment, potentially gaining from advancements in artificial intelligence.