US equity valuations are currently very high, with the S&P 500 trading at 21.5 times forward earnings, which is seven times above its long-term average and even higher than the spread observed in 2021. This valuation is also six times above non-domestic equities, represented by the Bloomberg World Index excluding the US. In contrast, the Bloomberg Emerging Markets Index is sitting at a P/E of only 13X, highlighting a substantial valuation gap between US and emerging markets hbwealth.com.
Emerging market equities currently trade at an exceptionally deep discount of nearly 40% relative to developed markets. The MSCI Emerging Markets Index trades at 11.7x forward earnings, which is below its 10-year average of 12.2x and its 20-year average of 11.7x. This compares to developed markets at 19.4x, with a long-term average discount closer to 25% rbcwealthmanagement.com. While some of this discount reflects elevated developed market valuations, it also suggests that global investor positioning towards emerging markets remains light after a period of subdued relative performance.
Despite this valuation disparity, emerging markets have shown strong performance. EM equities have outperformed developed markets since late 2024, with the MSCI Emerging Markets Index generating annualized returns of 35.6% through April 2026, compared to 17.3% for the MSCI World Index. In 2025, EM equities posted a gain of 33.6%, significantly outpacing the S&P 500's 17% and the MSCI World index's 21% ssga.com. This strong performance has continued into 2026, with a 5% rise year-to-date. Consensus expects 21% EPS growth in EM equities this year, substantially higher than the US at 15% and developed markets at 13% ssga.com.
Despite these positive trends, investors remain largely underweight in emerging market equities. While EM equity funds saw significant inflows of approximately $30 billion in 2025, primarily from ETF buyers ($88 billion), non-ETFs experienced outflows of $58 billion. Brazil stands out as a particular opportunity within emerging markets, with its market trading at a 10% discount to the overall EM valuation, which is itself 17% above its 20-year average reuters.com. Brazil's economy is showing health, with a rising composite PMI and a forecast of up to 300 basis points reduction in its 15% interest rate in 2026, which is expected to benefit highly leveraged domestic companies.
