Emerging markets (EM) are staging a powerful comeback in 2026, significantly outperforming US equities as the S&P 500 remains relatively flat. The rally is broad and persistent, supported by strong capital inflows, favorable macroeconomic conditions, and structural shifts in global trade. The iShares MSCI Emerging Markets ETF, for instance, attracted over $4 billion in January 2026, marking its strongest month for inflows since 2015. This outperformance has led to a 25 percentage point gap over the S&P 500 in the last 12 months, the largest divergence since January 2010.
Several factors are fueling this resurgence. Capital is rotating away from crowded US growth trades towards cyclicals, commodities, and regions directly exposed to AI hardware demand. A weakening US dollar is also playing a crucial role, easing financing conditions for EM countries and improving relative returns. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, notes that the US Dollar Index is close to breaking its long-term uptrend, with expectations of further Federal Reserve rate cuts adding downward pressure. Central banks are also diversifying away from the US dollar towards gold, and a persistent US trade deficit is expanding the global supply of dollars.
The rally is not confined to technology, with commodity-linked economies such as Brazil benefiting from strong metals and agricultural demand. Thailand is also experiencing growth. This strong performance is underpinned by improving earnings, with EM earnings projected to grow by 18% in 2026, outpacing both the US and other developed markets. This earnings-driven recovery is seen as a more sustainable foundation for future performance compared to previous rallies driven by valuation expansion. Despite this strong performance, EM valuations remain attractive, with the MSCI Emerging Markets Index trading at 11.7x forward earnings, below its 10-year and 20-year averages.
After a decade dominated by US exceptionalism, the current EM rally suggests a potential broadening of global financial leadership. This shift is driven by currency dynamics, changing capital flows, and the geography of AI-driven production. If sustained, this trend could reshape portfolio allocations and challenge the long-standing concentration of global equity returns in a narrow group of US mega-cap stocks. While geopolitical risks and potential energy price volatility remain concerns, the fundamental re-rating of EM equities appears to be on track, offering compelling value for long-term investors.
