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Stocks in developing economies are now trading at less than half the price-to-earnings multiple of their US counterparts. That hasn’t happened in at least twenty years, and it’s forcing a conversation about whether the trade of the decade is sitting right in front of everyone’s face.
The MSCI Emerging Markets Index is carrying forward P/E ratios somewhere between 11.6x and 13.5x, while the S&P 500 continues to command multiples north of 20x. That puts the discount at roughly 40-50%, well above the historical average of 25-28%. To put it in simpler terms: investors are paying twice as much for a dollar of expected US earnings as they are for a dollar of emerging-market earnings.
The numbers that make the case
In 2025, the MSCI EM Index returned 33.6%, nearly doubling the S&P 500’s 17% gain.
Consensus earnings growth forecasts for emerging markets in 2026 sit above 20%, comfortably ahead of projections for US and other developed markets. The growth engines are identifiable and concrete. Taiwan and South Korea are deeply embedded in the AI supply chain, manufacturing the chips and components that power everything from data centers to autonomous vehicles. Latin American commodity producers, meanwhile, are benefiting from elevated prices across energy and metals.
Goldman Sachs and State Street are among the firms pointing to improving fundamentals and favorable earnings revisions as reasons to take the EM story seriously this time around.
Why cheap hasn’t been enough before
Anyone who’s tracked emerging markets over the past decade knows that attractive valuations have been a recurring feature, not a reliable signal. EM stocks have spent much of the last ten years underperforming US equities despite frequently appearing inexpensive by traditional metrics.
What’s different now, proponents argue, is that the catalysts are more tangible. The dollar has shown signs of weakening. Earnings are being revised upward rather than downward. And the sectors driving EM performance, particularly AI-adjacent semiconductor manufacturing, are aligned with the strongest secular growth trend in global technology.
What rotation would actually require
For capital to meaningfully shift from US to emerging-market equities, a few things likely need to happen simultaneously. First, the dollar needs to cooperate. A weakening greenback mechanically boosts returns for US-based investors holding EM assets and reduces debt-servicing pressure on dollar-denominated emerging-market obligations.
Second, earnings delivery needs to be consistent, not just projected. Forecasts of 20%-plus growth are encouraging, but emerging markets have a history of disappointing on execution.
The 33.6% return in 2025 was broad-based and driven by fundamentals that analysts expect to persist. When the valuation discount is at a two-decade extreme and the earnings growth rate is exceeding that of the premium-priced alternative, the contrarian case starts looking less contrarian and more rational.
Still, the historical record demands humility. Valuation gaps of this magnitude have persisted for years without closing, and the catalysts that eventually trigger re-ratings, such as sustained dollar weakness, structural reform, or a US recession, are notoriously difficult to time.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
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