Emerging market companies are, for the first time in four years, consistently beating profit estimates, providing a robust, fundamental underpinning for the current rally and signaling to investors that a sustained bull market may be just beginning. This shift marks a significant inflection point, moving beyond speculative gains to a growth trajectory validated by solid earnings.
Fundamental Validation Drives Rally
Companies within the MSCI EM Index have reported average annual earnings above expectations set a year ago, a phenomenon not observed since April 2022, according to data compiled by Bloomberg. This positive earnings momentum is a critical development, as emerging-market stocks have already seen gains of nearly 30% this year. The evidence of healthy profit growth suggests that this rally is built on solid fundamentals, rather than being driven by speculative froth alone.
Archie Hart of Ninety One UK Ltd. underscored this sentiment, stating, ‘This is a genuine inflection point. The market is finally being validated by fundamentals rather than running ahead of them.’ This validation is evident in the weighted average earnings-per-share reported by MSCI companies in the 12 months through May, which stood at 95.1 index points, surpassing analysts’ blended-forward estimates of 94.6 made a year prior.
Key Drivers: Tech and Sectoral Diversification
The resurgence in profits is largely spearheaded by Asian technology firms, but the improvement is not confined to this sector. Other segments of the market are also demonstrating stronger earnings, including Indian oil refiners and Brazilian electricity companies. This broader improvement suggests a more diversified and resilient recovery across emerging economies.
Profits began to improve last year, following a period where they had fallen by 25% between 2022 and 2024 as higher interest rates sapped growth. This turnaround has been attributed, in part, to increased artificial intelligence (AI) spending and China’s economic stimulus measures.
Among the AI-related juggernauts, South Korea’s SK Hynix reported a first-quarter profit 43% above estimates. Samsung Electronics exceeded projections by 16%, and Taiwan Semiconductor Manufacturing Co. (TSMC) beat forecasts by 5.7%. Beyond tech, Indian Oil Corp. surpassed estimates by 33%, while Brazilian electricity producer Eneva SA posted a significant 44% beat, highlighting the breadth of the earnings surprises.
Valuation Discounts and Allocation Shifts
The compelling earnings performance is further amplified by attractive valuations in certain emerging market segments. Emerging-market technology companies, for instance, continue to trade at a steep discount compared to their US counterparts, despite generating faster earnings growth. An index of US semiconductor equipment makers trades at over 46 times estimated 12-month forward earnings, while the MSCI EM Information Technology Index trades at a comparatively modest 12.3 times.
This combination of strong earnings and favorable valuations is prompting major financial institutions to revise their outlooks. Investors like Morgan Stanley and JPMorgan Chase & Co. are now predicting that gains will extend beyond AI-related stocks, spreading across the broader emerging market universe. Stronger earnings are expected to persuade more asset managers to reallocate capital to EM stocks, potentially fueling the next stage of the rally.
Archie Hart’s calculations illustrate the potential impact of such shifts: a mere 5% reallocation from US portfolio weightings could translate into roughly a 30% increase in EM allocations, given the relative sizes of the markets.
Navigating Regional Disparities and Concentration Risks
While the overall direction of travel for emerging market profits is positive, regional variations and concentration risks remain pertinent considerations. Jitania Kandhari, Deputy Chief Investment Officer at Morgan Stanley Investment Management, noted, ‘Performance across different regions will likely continue to vary, but the direction of travel across virtually all of them is now positive, which has not been true for most of the past decade.’
However, Kandhari also highlighted concerns regarding the dominance of the AI trade, which is raising questions about concentration risk. Asian companies are currently beating expectations by a wide margin, whereas other parts of the EM universe are experiencing more modest or even negative surprises. This disparity underscores the importance of a nuanced approach to emerging market investments, even as the overall earnings picture brightens.
The current wave of earnings surprises provides a robust, fundamental argument for a sustained bull run in emerging markets. With profits exceeding expectations for the first time in four years, and key sectors demonstrating strong growth, the narrative is shifting from a speculative rally to one grounded in solid financial performance, though investors will continue to monitor regional performance and potential concentration risks.
