Recent Performance [1]
After a prolonged period of underperformance stretching from 2018 to 2024, emerging market (EM) equities have reversed course. 2025 marked a reversal, with EM outperforming the US markets broadly (32.5% vs. 17.9%), a trend continuing in the first six months of 2026 (28.4% vs. 10.2%). Emerging market outperformance has occurred despite lagging returns from two of the index’s largest constituents: China (+13.0%) and India (-5.8%). The primary drivers of EM returns are Korea (+111.6%) and Taiwan (+59.1%), which together account for roughly two-thirds of the emerging market index’s overall gains. 2026 emerging market outperformance is even more remarkable given USD strength.
Valuations and the Earnings-Driven Re-rating
Despite strong index returns, EM equities have actually de-rated in 2026. The forward P/E multiple has compressed from 15.8x at the start of the year to 13.2x currently, a contraction of 2.6 turns. This de-rating is significant because it confirms that the YTD return of +28.4% has been driven entirely by earnings revisions, not multiple expansion. Consensus EPS estimates for 2026 rose from 90 to 135.85 (+51%), and 2027 estimates moved from 105 to 165.68 (+58%), representing substantial and broad-based upward revisions.
The de-rating itself carries an important implication: the market has chosen to discount a higher earnings base at a lower multiple, suggesting that investors remain cautious about the durability or quality of the earnings improvement, or that macro and geopolitical uncertainties (trade friction, dollar volatility, de-globalization) are acting as a ceiling on sentiment and risk appetite. In other words, earnings have outpaced investor conviction.
The Case for Re-rating
At the 2027 consensus EPS of 165.68, the difference between a 13.2x and 15x multiple implies an EM index level roughly 14% higher, which, layered on top of continued EPS growth, would produce meaningfully amplified total returns.
It is also worth noting that at 15x forward earnings, EM valuations would still sit below long-term historical averages for developed markets, meaning a re-rating to that level would not require an assumption of valuation excess, but simply a normalization of the current risk discount.
The feasibility of such a re-rating depends on several conditions. Historically, EM multiples have expanded during periods of dollar weakness, falling U.S. real rates, improving global growth momentum, and reduced geopolitical or trade uncertainty, some of which are at least partially present today.
Earnings Outlook
After a decade of underperformance, EM earnings growth is now broadly matching and in 2026 materially exceeding the U.S. The upward revisions to 2026 (+51%) and 2027 (+58%) EPS estimates represent one of the more significant consensus earnings upgrades in recent EM history. Profit growth is broad-based, and over the next 12 months, further EM upside is expected to come from continued EPS growth and/or multiple expansion. Asia, which accounts for over 80% of the MSCI EM index by market cap, is seen as a key driver, with a better macro backdrop expected to support profit margins. In China specifically, margins are not expected to recover to mid-2010s levels, but they are expected to stabilize after years of decline.
Key Risks and Headwinds
Three macro factors were tailwinds for EM assets over the past 18 months: solid global growth, easing U.S. monetary policy, and a weakening U.S. dollar.
Global growth was 3.4% in 2025. Looking ahead, global growth is expected to decelerate to 2.9% (2026) before reaccelerating to 3.1% (2027), supported by falling oil prices, fading tariff impacts, and increased trade certainty. The global manufacturing cycle has been more resilient than expected, with broad-based strength in capital expenditures.
Still, the USD declined in 2025 but entered 2026 approximately 10% above fair value on a trade-weighted basis. Lower U.S. interest rates, a larger fiscal deficit, and improving global growth are all expected to exert continued downward pressure on the dollar. A weaker dollar historically supports EM currencies, reduces external debt burdens, and improves EM export competitiveness.
Finally, other macro conditions have shifted as a result of the Iran War, with major central banks (ECB, BOJ) raising rates and the Warsh-led Fed taking on a more hawkish stance. Against this backdrop, we think the re-rating case has a steep hill to climb, which tempers the case for the asset class.
Conclusion
We see upside/downside risk as balanced. Our target range for MSCI Emerging Markets is 2050 (+16%) and 1500 (-16%). We expect EM volatility to be materially higher than that of developed markets, reflecting an increasingly fragmented economy driven by de-globalization.
Earnings momentum in the highly cyclical Korean and Taiwanese markets is the dominant factor to watch. Given recent dollar strength and a pivot toward more hawkish monetary policy by major central banks, we do not believe macro conditions are in place to support a major multiple re-rating. For these reasons, RiskBridge maintains a neutral positioning to emerging market equities.
[1] Market data in this report is as of June 18, 2026 and sourced from Bloomberg unless otherwise denoted.
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