Introduction to Emerging Markets
Emerging markets were a big surprise in 2025, with stocks in the developing world on pace to record their best year since 2017. According to Goldman Sachs Research, the MSCI Emerging Markets Index is expected to return nearly 30% this year, driven by strong earnings across regions and favorable macroeconomic trends.
A High Bar to Replicate
This performance will be difficult to replicate, says Kamakshya Trivedi, chief foreign exchange and emerging markets strategist at Goldman Sachs. "Looking ahead, the performance obviously sets a very high bar to replicate," Trivedi says. "But some of the tailwinds present in 2025 are going to repeat in 2026, so we still expect good returns after a great 2025." The tailwinds include the resilience of China’s exports, a weakening US dollar, and the economic benefits of falling commodity prices.
Outlook for 2026
Trivedi forecasts that emerging markets in 2026 will rise about 13% in terms of price, and roughly 16% on a total return basis. The breadth of emerging markets provides investors with a way to moderate the sudden reversals in the US stock market stemming from the concentration in artificial intelligence (AI) and technology stocks. The asset class’s regional diversification brings balance to portfolio allocation, Trivedi says, especially as macroeconomic conditions are improving in the developing world.
Key Factors Contributing to Emerging Markets’ Success
Several factors have contributed to the success of emerging markets, including:
- Unchallenging valuations and a favorable macro backdrop
- Central banks easing interest rate policy across a range of emerging markets
- Resilience in the face of tariff-related volatility
- Geographic diversification, with different regions performing well in different quarters
Responding to Shocks
Emerging markets have become more resilient to global shocks and have responded less severely than they have historically. When concerns mounted about US-China trade tensions and a possible bubble in AI, the MSCI EM index declined less than the S&P 500 on average. The regional diversification of emerging markets helps to balance technology sectors that have been doing well with markets that are less tech-oriented but have interesting growth stories of their own.
Regional Highlights
Some regions are doing particularly well, such as:
- South Africa, where strong profitability in mining and fiscal consolidation are driving growth
- Brazil and India, which have interesting growth stories of their own and are less tech-oriented
- China, where the rally has been powered by the AI theme and technology hardware and semiconductor sectors are expected to see strong earnings growth
Conclusion
In conclusion, emerging markets had a strong performance in 2025 and are expected to continue to do well in 2026, driven by favorable macroeconomic trends and regional diversification. While the performance of 2025 will be difficult to replicate, the tailwinds that drove growth in 2025 are expected to continue, and emerging markets are likely to remain a good investment opportunity. With their ability to moderate the sudden reversals in the US stock market and provide balance to portfolio allocation, emerging markets are an attractive option for investors looking to diversify their portfolios.
