For the first time since April 2022, companies in emerging markets are reporting average annual earnings that surpass expectations set a year prior, according to Bloomberg data. This positive shift is leading investors to believe that the current 30% gains in emerging market stocks this year are built on solid fundamentals rather than speculative enthusiasm. Financial institutions like Morgan Stanley and JPMorgan Chase & Co. are predicting that this rally will expand beyond just AI-related stocks.
Asian tech firms are a primary driver of these strong results, but profit improvements are also evident in other sectors, such as Indian oil refiners and Brazilian electricity companies. For instance, Indian Oil Corp exceeded estimates by 33%, and Brazilian electricity producer Eneva posted a 44% beat. While energy and financial companies are now consistently beating estimates, and commodity and industrial firms are meeting expectations, consumer staples, consumer discretionary, healthcare, real estate, and utilities sectors are still underperforming forecasts.
This comeback in emerging market profits began in 2025, following a 25% decline between 2022 and 2024 due to high interest rates. The renewed growth is attributed to increased AI spending and China's economic stimulus. Further contributing to a wider earnings recovery are factors like China's emergence from deflation, which is expected to spur industrial recovery, and a slowdown in equity issuance coupled with rising share buybacks, which boosts earnings per share.
JPMorgan Asset Management anticipates a broad revival across emerging markets that will underpin ongoing earnings growth. Anuj Arora, Chief Investment Officer for emerging-market equities at JPMAM, suggests that industrial, defense, and commodity sectors will particularly benefit as China's economy recovers and inflation accelerates. He also highlighted that a softer dollar, ongoing deficit spending in major economies, and a multi-year AI and infrastructure capital expenditure cycle are creating a constructive environment for emerging markets.
Another compelling point is that emerging market technology companies currently trade at a significant discount compared to their US counterparts, despite generating faster earnings growth. This valuation disparity is seen as another reason for bullish sentiment among investors. A potential 5% reallocation of funds from US portfolio weightings could translate into approximately a 30% increase in allocations to emerging markets, given the relative sizes of these markets.
