Emerging Markets Are Roaring Back - And Wall Street's Starting To Chase

After a staggering 34% gain in 2025, emerging markets are again stealing the spotlight in 2026, with country-specific ETFs up double digits and analysts citing a confluence of dollar weakness, AI-driven capex and accelerating earnings as key catalysts.

South Korea, Brazil And Peru Dominate 2026 ETF Leaderboard

U.S.-listed emerging market country ETFs are delivering standout performances year-to-date, according to CountryETFTracker.com.

South Korea leads with the iShares MSCI South Korea ETF (NYSE:EWY) up 29.65%, followed by iShares MSCI Peru and Global Exposure ETF (NYSE:EPU) at 25.89% and iShares MSCI Brazil ETF (NYSE:EWZ) rising 20.93%.

Turkey and Colombia aren’t far behind, gaining 20.69% and 17.31% respectively.

Overall, while the SPDR S&P 500 ETF (NYSE:SPY) is essentially flat this year, the iShares MSCI Emerging Markets ETF (NYSE:EEM) is already up about 10%.

5 Reasons Why Emerging Markets Could Keep Outperforming

In a note shared with clients on Tuesday, LPL Financial analysts Jeff Buchbinder and Adam Turnquist laid out five drivers supporting EM momentum in 2026.

1. Dollar Breakdown Boosts EM Assets

The U.S. Dollar Index (DXY) is hovering near critical technical support levels.

LPL sees potential for a 5% downside, aided by prospects of more Federal Reserve rate cuts and a Trump administration that supports a weaker dollar to improve trade balances.

A weaker dollar increases the relative value of EM exports and reduces debt-servicing costs for dollar-denominated obligations.

Geopolitical diversification by central banks and a shrinking U.S. trade deficit further add pressure on the greenback. However, persistent inflation or a hawkish new Fed chair could spark temporary dollar rebounds.

2. EM Earnings Growth Outpaces U.S.

After years of underperformance post-2008, EM earnings are finally catching up.

LPL forecasts 29% EM earnings growth in 2026, compared to just 14% in the U.S. The fourth quarter of 2025 already saw 16% earnings growth in EM, outpacing the U.S. at 13%.

Much of this optimism hinges on corporate governance improvements and capital allocation reforms across markets like China, India and South Korea — as well as the powerful tailwind of AI-related growth.

3. Asia's Role in AI Supply Chain Is Critical

The MSCI Emerging Markets Index has a 30%+ weighting in technology, on par with the S&P 500.

This includes firms tied directly to the AI supply chain, such as Samsung Electronics, and chipmakers across Taiwan and South Korea.

With global AI infrastructure investment projected to exceed $650 billion in 2026, EM nations with deep manufacturing and tech capabilities stand to benefit significantly.

4. Technical Breakout Supports Trend

The MSCI EM Index has broken past its 2021 highs, and more than two-thirds of its components now trade above their 200-day moving average. Its ratio to the S&P 500 just hit a two-year high, signaling a shift in relative momentum.

According to LPL’s Turnquist, this may confirm "a new relative uptrend" that could sustain.

5. Valuation Gap Still Wide

Despite the rally, EM stocks remain historically cheap.

As of late 2025, EM traded at a 40% discount to the U.S. on a forward price-to-earnings basis. Over the past 15 years, such discounts failed to drive performance due to weak fundamentals. That's no longer the case.

With forward earnings now recovering, the iShares Emerging Markets Ex China ETF (NYSE:EMXC) is up 13.5% year-to-date, while the EEM ETF is up 10.6% — the valuation story has shifted.

Analysts now see strong earnings traction, driven by middle-class growth, industrial exports and a growing share in global production.

Is This A Long-Term Shift?

Veteran strategist Ed Yardeni echoed the optimism on emerging markets.

In an emailed note, he said that recent EM gains signal "resilience of the global economy" despite Trump tariffs and lingering geopolitical risks.

He believes U.S. exceptionalism isn't over but sees international portfolios benefiting from rebalancing — especially as U.S. market-cap dominance in global indices remains historically high.

“The big-picture story is that emerging markets have rapidly growing middle-class populations that are aspiring to become more prosperous,” Yardeni said.

“Both industrial production and exports of emerging economies have increasingly exceeded those of the advanced economies,” he added.

From a historical perspective, EM outperformance tends to come in long cycles.

Between 2003 and 2010, EM stocks led global equity markets. If the current macro and earnings setup holds, analysts say the rally could stretch well beyond 2026.

Image created using artificial intelligence via Midjourney.