Euro-Zone Private Sector Expansion and Its Implications for Equities and Regional Growth

The Eurozone's private sector has navigated a fragile recovery in 2025, marked by divergent performances between the services and manufacturing sectors. While the Composite PMI rebounded to 51.2 in September 2025, its highest in 16 monthsEuro zone business activity hits 16-month high but new orders stall^[1], the underlying dynamics reveal a stark contrast: services activity surged to 51.4, but manufacturing remained in contraction at 49.5Eurozone Economic Outlook Q3 2025: Gradual recovery amid trade uncertainty^[2]. This divergence has critical implications for equity investors, particularly those targeting small and mid-cap (SMID) manufacturers and service providers.

A Tale of Two Sectors: Services Resilience vs. Manufacturing Struggles

The services sector has emerged as a stabilizer for the Eurozone economy, driven by domestic demand and robust labor markets. By September 2025, services PMI hit 51.4, its highest since July 2024Euro zone business activity hits 16-month high but new orders stall^[1], reflecting resilience amid trade uncertainties. This strength positions SMID-cap service providers—such as logistics firms, healthcare providers, and technology services—as attractive equity candidates. For instance, European transport and logistics companies have adapted to U.S. tariff pressures by optimizing domestic supply chainsImpact of US tariffs on European businesses^[3], a trend that could enhance their margins in a low-interest-rate environment.

Conversely, manufacturing remains under pressure. The sector's PMI has lingered below 50 since May 2025Flash eurozone PMI heralds gloomier outlook as confidence slumps^[4], with new orders stagnating despite modest output gainsEuro zone business activity hits 16-month high but new orders stall^[1]. Small and mid-cap manufacturers, particularly in chemicals and steel, face compounding challenges from U.S. tariffs. A 15% uniform tariff on EU imports to the U.S., agreed upon in July 2025The Truth About the Latest U.S. EU Tariff Moves^[5], has disproportionately affected SMEs with thin profit margins. For example, the EU's €655B chemical sector has seen smaller firms delay exports or pivot to Asian marketsThe Truth About the Latest U.S. EU Tariff Moves^[5], while others struggle to absorb higher costs.

Strategic Equity Positioning: Opportunities and Risks

For investors, the Eurozone's sectoral divergence demands a nuanced approach. SMID-cap service providers, which are less exposed to trade tensions and more tied to domestic growth, offer compelling opportunities. Amundi highlights that European SMID stocks trade at historic valuation discounts to large capsIs it time to consider European Small and Midcaps?^[6], supported by ECB rate cuts (projected to reach 1.50% by July 2025Is it time to consider European Small and Midcaps?^[6]) and strong balance sheets. The European Small and Mid-Cap Awards 2025 further underscore the sector's innovation potential, with shortlisted companies excelling in sustainability and digital transformationTwelve outstanding companies shortlisted for 2025 European Small and Mid-Cap Awards^[7].

However, manufacturing SMIDs remain high-risk. The sector's exposure to U.S. tariffs—such as the 15% duty on steel and aluminum—has weakened revenue growth, per Fitch RatingsUS Tariffs to Cut Revenue, Profit Growth for European Corporate Sectors^[8]. Companies like Shapes Unlimited, which diversified suppliers to mitigate risksThe Truth About the Latest U.S. EU Tariff Moves^[5], exemplify adaptive strategies, but many SMEs lack the scale to replicate such moves. Investors should prioritize service-oriented SMIDs and avoid overexposure to manufacturing sub-sectors vulnerable to trade shocks, such as automotive and industrial materialsEuropean Equities Outlook Q3 2025 | Allianz Global^[9].

Macroeconomic Tailwinds and Geopolitical Headwinds

The Eurozone's broader economic outlook is cautiously optimistic. S&P Global projects growth of 0.8% in 2025, rising to 1.4% by 2027Eurozone Economic Outlook Q3 2025: Gradual recovery amid trade uncertainty^[2], driven by fiscal stimulus and ECB easing. Yet, external risks persist. The U.S. administration's tariff deadlines in July 2025European Equities Outlook Q3 2025 | Allianz Global^[9] and potential retaliatory measures—such as EU tariffs on U.S. beef and whiskeyUS Tariffs: What’s the Impact? | J.P. Morgan Global Research^[10]—could reignite volatility. For SMID equities, this environment favors defensive positioning in services and selective exposure to manufacturing firms with diversified supply chains.

Conclusion: Navigating the PMI Divergence

The Eurozone's private sector expansion in 2025 is a story of resilience and fragility. While services PMI trends and ECB policy support SMID service providers, manufacturing SMIDs face structural headwinds from trade tensions. Investors should adopt a sector-rotation strategy, overweighting services and underweighting manufacturing, while monitoring tariff developments and ECB rate trajectories. As the Eurozone balances domestic growth with external uncertainties, SMID equities offer a unique blend of risk and reward for those who navigate the PMI divergence with precision.