Emerging markets have become 2025's breakout stars, outpacing AI-fueled Wall Street and defying Donald Trump‘s tariff headwinds, as strong economic growth, attractive valuations and structural reforms continue to attract a wave of global investor capital.
The iShares MSCI Emerging Markets ETF (NYSE:EEM) has gained 29% year-to-date, outperforming the SPDR S&P 500 ETF Trust (NYSE:SPY) by 15 percentage points—the biggest lead since 2009.
And investor expectations are for emerging markets to maintain their lead.
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 in the survey. Meanwhile, perceived risk in emerging markets dropped to its lowest level since September 2011.
For investors exclusively betting on artificial intelligence and U.S. tech mega caps, that's a tough pill to swallow.
Chart: Emerging Markets Outpace S&P 500 By Most Since 2009
Goldman Sachs Sees Double-Digit EM Returns Over The Decade
Goldman Sachs' chief global strategist, Peter Oppenheimer, is calling for a strategic shift in investor portfolios, tilting away from the U.S. and toward Emerging Markets and Asia.
In a report shared last week, Goldman Sachs forecasted a 12.8% annual return in U.S. dollars over the next 10 years. In comparison, the S&P 500 is expected to deliver just 6.5% annually over the same period.
"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."
While U.S. equities benefited over the past decade from dominant tech performance, falling interest rates and high profit margins, many of those tailwinds may now reverse or plateau. Emerging Markets, meanwhile, offer better valuations, higher earnings growth and improving shareholder policies.
Valuation spreads between U.S. and global markets remain wide. The MSCI Emerging Markets index trades at 14x forward earnings, compared to 23x for the U.S.
This valuation gap offers a cushion against downside risks, while earnings revisions have turned neutral after years of underperformance.
Latin America's Rebound
One of the most vocal proponents of the Latin American rally is Otavio (Tavi) Costa, a global macro strategist at Crescat Capital, who sees the region entering a new structural phase of growth and relevance on the global stage.
"The Latin American MSCI Index is breaking out," Costa said in a recent post on social media X.
In his view, Latin America’s growing strategic importance stems from its role as a critical supplier of raw materials needed for next-generation global industries.
That includes 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.”
Latin America has emerged as one of 2025's top-performing regions, with the iShares Latin America 40 ETF (NYSE:ILF) up 43% year-to-date.
Country-specific funds have delivered blockbuster gains: the iShares MSCI Brazil ETF (NYSE:EWZ) and iShares MSCI Mexico ETF (NYSE:EWW) have risen 43% and 40%, respectively, while the iShares MSCI Peru and Global Exposure ETF (NYSE:EPU) soared 54%, the iShares MSCI Chile ETF (NYSE:ECH) added 51%, and the Global X MSCI Colombia ETF (NYSE:GXG) surged 61%.
Risks Remain, But So Do Bargains
Veteran market strategist Ed Yardeni indicated that domestic instability, geopolitical tension and pockets of debt stress continue to weigh on some regions.
But, he said, "the EM macroeconomic growth path is justifying the equities' runup."
Yardeni highlighted the broadening economic momentum across the developing world, aligning with forecasts from the International Monetary Fund, which expects emerging and developing economies to grow over 4.0% in 2025–26, nearly triple the pace of advanced economies.
But the performance dispersion tells a more nuanced story.
While South Korea, Colombia, and Peru have posted massive equity gains—up 82.1%, 62.4%, and 44.9%, respectively—others like Thailand, Malaysia, and Saudi Arabia have turned in negative returns.
This variance reflects the ongoing imbalance between policy execution, capital market structure, and macro vulnerabilities across the EM 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."
Last but not least, this 2025 emerging market rally has not erased valuation discounts.
The MSCI Emerging Markets index trades at around 14 times forward earnings—well below the U.S. MSCI's forward P/E of 23.
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