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Emerging Markets Are Having Their Moment While Wall Street's AI Trade Loses Steam

MarketDash Editorial Team
19 days ago
Emerging markets are trouncing the S&P 500 by the widest margin in over 15 years, fueled by compelling valuations, structural reforms, and earnings growth that's making Wall Street's AI obsession look a bit one-dimensional.

If you've spent 2025 laser-focused on artificial intelligence and U.S. tech giants, you might want to look away now. Emerging markets have quietly become this year's breakout performers, leaving Wall Street's AI darlings in the dust and shrugging off Donald Trump's tariff threats like they're background noise.

The numbers tell a striking story. The iShares MSCI Emerging Markets ETF (EEM) has surged 29% year-to-date, crushing the SPDR S&P 500 ETF Trust (SPY) by 15 percentage points. That's the widest performance gap since 2009, when emerging markets were bouncing back from the financial crisis.

What's more interesting is that investors aren't treating this as a flash in the pan. According to Bank of America's latest Global Fund Manager Survey, 37% of respondents expect MSCI Emerging Markets to outperform in 2026, more than any other asset class surveyed. Meanwhile, perceived risk in emerging markets has dropped to its lowest level since September 2011.

For those who've been exclusively betting on AI and U.S. tech mega caps, this shift represents a pretty significant challenge to the dominant narrative of the past few years.

Goldman Sachs Makes A Bold Call On The Next Decade

Goldman Sachs' chief global strategist, Peter Oppenheimer, isn't mincing words about where he thinks investors should be positioning themselves. He's advocating for a strategic portfolio shift away from U.S. equities and toward Emerging Markets and Asia.

In a report released last week, Goldman forecasted a 12.8% annual return in U.S. dollars for emerging markets over the next 10 years. Compare that to the S&P 500, which is expected to deliver just 6.5% annually over the same period. That's nearly double the return.

"Diversify beyond the U.S., with a tilt towards Emerging Markets," Oppenheimer said in the report. "We expect higher nominal GDP growth and structural reforms to favour EM, while AI's long-term benefits should be broad-based rather than confined to U.S. technology."

The logic here is pretty straightforward. U.S. equities benefited enormously over the past decade from dominant tech performance, falling interest rates, and high profit margins. But many of those tailwinds are now reversing or plateauing. Emerging markets, by contrast, offer better valuations, higher earnings growth, and improving shareholder policies.

The valuation gap is particularly striking. The MSCI Emerging Markets index trades at 14 times forward earnings, compared to 23 times for U.S. markets. That discount provides a meaningful cushion against downside risks, while earnings revisions have turned neutral after years of disappointing performance.

Latin America Takes Center Stage

One of the most compelling emerging market stories right now is unfolding in Latin America. Otavio (Tavi) Costa, a global macro strategist at Crescat Capital, has been one of the most vocal proponents of the Latin American rally, arguing that the region is entering a new structural phase of growth and global relevance.

"The Latin American MSCI Index is breaking out," Costa said in a recent post on social media platform X.

Costa's thesis centers on Latin America's growing strategic importance as a critical supplier of raw materials needed for next-generation global industries. We're talking rare earths, lithium, copper, and other essential inputs for manufacturing reshoring, power grid upgrades, AI infrastructure, data centers, defense expansion, and the clean energy transition.

"There's a growing awareness of Latin America's strategic importance to the U.S. and other Western economies," Costa said. "Exciting times likely ahead for this region, in my view."

The performance numbers back up his enthusiasm. Latin America has emerged as one of 2025's top-performing regions, with the iShares Latin America 40 ETF (ILF) up 43% year-to-date.

Country-specific funds have delivered truly blockbuster gains. The iShares MSCI Brazil ETF (EWZ) and iShares MSCI Mexico ETF (EWW) have risen 43% and 40%, respectively. Meanwhile, the iShares MSCI Peru and Global Exposure ETF (EPU) soared 54%, the iShares MSCI Chile ETF (ECH) added 51%, and the Global X MSCI Colombia ETF (GXG) surged an impressive 61%.

These aren't small moves in sleepy backwaters. These are substantial returns in markets that many investors had written off or ignored entirely.

A More Nuanced Picture Emerges

Veteran market strategist Ed Yardeni acknowledges that emerging markets aren't without their challenges. Domestic instability, geopolitical tension, and pockets of debt stress continue to weigh on some regions.

But, he noted, "the EM macroeconomic growth path is justifying the equities' runup."

Yardeni highlighted the broadening economic momentum across the developing world, which aligns with forecasts from the International Monetary Fund. The IMF expects emerging and developing economies to grow over 4.0% in 2025-26, nearly triple the pace of advanced economies.

However, the performance dispersion within emerging markets tells a more nuanced story. While South Korea, Colombia, and Peru have posted massive equity gains of 82.1%, 62.4%, and 44.9%, respectively, others like Thailand, Malaysia, and Saudi Arabia have delivered negative returns.

This variance reflects the ongoing imbalance between policy execution, capital market structure, and macro vulnerabilities across the emerging market landscape. Yardeni sees this as both a cautionary signal and a call for careful positioning.

"We see an opportunity to invest broadly across EMs," his team said, "but be mindful of the risks and regional disparities before leaping into positions."

The Valuation Discount Persists

Perhaps the most interesting aspect of this 2025 emerging market rally is that it hasn't erased the fundamental valuation discounts that made these markets attractive in the first place.

Even after significant gains, the MSCI Emerging Markets index trades at around 14 times forward earnings, well below the U.S. MSCI's forward P/E of 23. That means there's still a meaningful valuation cushion built into current prices.

For investors who've been all-in on the AI trade, the emerging markets story offers something different: compelling valuations, higher growth rates, structural reforms, and exposure to critical commodity supply chains. It's not flashy, but it's working.

The question now is whether this represents a temporary rotation or the beginning of a longer-term shift in global capital flows. Based on the fundamentals, Goldman Sachs and others are betting on the latter.

Back to News

Emerging Markets Are Having Their Moment While Wall Street's AI Trade Loses Steam

MarketDash Editorial Team
19 days ago
Emerging markets are trouncing the S&P 500 by the widest margin in over 15 years, fueled by compelling valuations, structural reforms, and earnings growth that's making Wall Street's AI obsession look a bit one-dimensional.

If you've spent 2025 laser-focused on artificial intelligence and U.S. tech giants, you might want to look away now. Emerging markets have quietly become this year's breakout performers, leaving Wall Street's AI darlings in the dust and shrugging off Donald Trump's tariff threats like they're background noise.

The numbers tell a striking story. The iShares MSCI Emerging Markets ETF (EEM) has surged 29% year-to-date, crushing the SPDR S&P 500 ETF Trust (SPY) by 15 percentage points. That's the widest performance gap since 2009, when emerging markets were bouncing back from the financial crisis.

What's more interesting is that investors aren't treating this as a flash in the pan. According to Bank of America's latest Global Fund Manager Survey, 37% of respondents expect MSCI Emerging Markets to outperform in 2026, more than any other asset class surveyed. Meanwhile, perceived risk in emerging markets has dropped to its lowest level since September 2011.

For those who've been exclusively betting on AI and U.S. tech mega caps, this shift represents a pretty significant challenge to the dominant narrative of the past few years.

Goldman Sachs Makes A Bold Call On The Next Decade

Goldman Sachs' chief global strategist, Peter Oppenheimer, isn't mincing words about where he thinks investors should be positioning themselves. He's advocating for a strategic portfolio shift away from U.S. equities and toward Emerging Markets and Asia.

In a report released last week, Goldman forecasted a 12.8% annual return in U.S. dollars for emerging markets over the next 10 years. Compare that to the S&P 500, which is expected to deliver just 6.5% annually over the same period. That's nearly double the return.

"Diversify beyond the U.S., with a tilt towards Emerging Markets," Oppenheimer said in the report. "We expect higher nominal GDP growth and structural reforms to favour EM, while AI's long-term benefits should be broad-based rather than confined to U.S. technology."

The logic here is pretty straightforward. U.S. equities benefited enormously over the past decade from dominant tech performance, falling interest rates, and high profit margins. But many of those tailwinds are now reversing or plateauing. Emerging markets, by contrast, offer better valuations, higher earnings growth, and improving shareholder policies.

The valuation gap is particularly striking. The MSCI Emerging Markets index trades at 14 times forward earnings, compared to 23 times for U.S. markets. That discount provides a meaningful cushion against downside risks, while earnings revisions have turned neutral after years of disappointing performance.

Latin America Takes Center Stage

One of the most compelling emerging market stories right now is unfolding in Latin America. Otavio (Tavi) Costa, a global macro strategist at Crescat Capital, has been one of the most vocal proponents of the Latin American rally, arguing that the region is entering a new structural phase of growth and global relevance.

"The Latin American MSCI Index is breaking out," Costa said in a recent post on social media platform X.

Costa's thesis centers on Latin America's growing strategic importance as a critical supplier of raw materials needed for next-generation global industries. We're talking rare earths, lithium, copper, and other essential inputs for manufacturing reshoring, power grid upgrades, AI infrastructure, data centers, defense expansion, and the clean energy transition.

"There's a growing awareness of Latin America's strategic importance to the U.S. and other Western economies," Costa said. "Exciting times likely ahead for this region, in my view."

The performance numbers back up his enthusiasm. Latin America has emerged as one of 2025's top-performing regions, with the iShares Latin America 40 ETF (ILF) up 43% year-to-date.

Country-specific funds have delivered truly blockbuster gains. The iShares MSCI Brazil ETF (EWZ) and iShares MSCI Mexico ETF (EWW) have risen 43% and 40%, respectively. Meanwhile, the iShares MSCI Peru and Global Exposure ETF (EPU) soared 54%, the iShares MSCI Chile ETF (ECH) added 51%, and the Global X MSCI Colombia ETF (GXG) surged an impressive 61%.

These aren't small moves in sleepy backwaters. These are substantial returns in markets that many investors had written off or ignored entirely.

A More Nuanced Picture Emerges

Veteran market strategist Ed Yardeni acknowledges that emerging markets aren't without their challenges. Domestic instability, geopolitical tension, and pockets of debt stress continue to weigh on some regions.

But, he noted, "the EM macroeconomic growth path is justifying the equities' runup."

Yardeni highlighted the broadening economic momentum across the developing world, which aligns with forecasts from the International Monetary Fund. The IMF expects emerging and developing economies to grow over 4.0% in 2025-26, nearly triple the pace of advanced economies.

However, the performance dispersion within emerging markets tells a more nuanced story. While South Korea, Colombia, and Peru have posted massive equity gains of 82.1%, 62.4%, and 44.9%, respectively, others like Thailand, Malaysia, and Saudi Arabia have delivered negative returns.

This variance reflects the ongoing imbalance between policy execution, capital market structure, and macro vulnerabilities across the emerging market landscape. Yardeni sees this as both a cautionary signal and a call for careful positioning.

"We see an opportunity to invest broadly across EMs," his team said, "but be mindful of the risks and regional disparities before leaping into positions."

The Valuation Discount Persists

Perhaps the most interesting aspect of this 2025 emerging market rally is that it hasn't erased the fundamental valuation discounts that made these markets attractive in the first place.

Even after significant gains, the MSCI Emerging Markets index trades at around 14 times forward earnings, well below the U.S. MSCI's forward P/E of 23. That means there's still a meaningful valuation cushion built into current prices.

For investors who've been all-in on the AI trade, the emerging markets story offers something different: compelling valuations, higher growth rates, structural reforms, and exposure to critical commodity supply chains. It's not flashy, but it's working.

The question now is whether this represents a temporary rotation or the beginning of a longer-term shift in global capital flows. Based on the fundamentals, Goldman Sachs and others are betting on the latter.