As EM stocks near new highs, the drivers of the rally are shifting from rising valuations to, recently, rapid earnings upgrades. Better earnings prospects, if validated, create a stronger baseline for outperformance.
Demand for global diversification and the outperformance of EM stocks, which became defining market features over the past year, show no signs of exhaustion in early 2026. The 51% jump in EM stocks since the start of 2025 through late-February – the strongest run for such a period since 2009 – is more than double the dollar-term gain in developed-world peers (see Figure 1). The relative stability of the dollar since mid-2025, notably, did not halt the outperformance by EM stocks. Against this backdrop of strong absolute and relative EM returns, investors have been pouring money into global EM funds this year at the fastest pace in nearly two decades.
Figure 1: Yearlong outperformance by EM stocks accelerated in early 2026 (Emerging vs Developed markets, relative returns)
Source: MSCI. Data as of February 24, 2026.**
As the bull market in EM stocks advances, the drivers of the gains are shifting in a constructive way, in our view. Last year, multiple rerating contributed about half of the index’s returns (+34% in dollar terms) – valuation-led upside is a pattern common in early stages of a recovery. One result was that by late 2025, the scope for additional multiple-driven gains seemed more limited as various measures, such as price-to-book ratios, looked historically elevated. So far in 2026, by contrast, double-digit gains in EM stocks came entirely from strong, upward revisions to earnings prospects.
Optimism about EM earnings is encouraging for a handful of reasons. First, recent upgrades represent a break from the traditional pattern of high optimism at the start of each year, followed by gradual earnings downgrades over the course of the year. The surge in commodity prices, rising AI-capex budgets and positive global growth prospects are all playing a positive role. Second, these upward revisions put expected EM earnings growth ahead of DM – one factor, along with dollar weakness and widening growth differentials, that historically coincided with periods of prolonged EM outperformance.
And better earnings growth, if validated by company results, also can provide a compelling “pull” factor for investors reassessing the merit of EM exposure. Uncertainty about the US policy path and the perceived erosion of US exceptionalism – for years a dominant investment narrative – acted as a catalyst (a “push” factor) for investors to rethink large overweight allocations to US assets. While flows data suggests the “sell America” trade was short lived, something closer to “diversify America” has been more persistent as incremental capital is being partly allocated to non-US assets. Given EM’s smaller capitalization, those incremental flows seem to be having a positive impact driving relative and absolute performance.
Figure 2: Stronger prospects for EM earnings growth after nearly a decade of stagnation (average earnings and economic growth)
Source: Bloomberg, IMF Data as of February 24, 2026.***
While positive EM earnings momentum provides a stronger baseline for additional index-level upside, wide return dispersion is also providing a compelling opportunity set within the asset class. For example, the 12-month trailing average return gap between the top and bottom 3 countries in the MSCI EM index (out of 24 countries) is currently over 120pp, well above the 60pp average of the past ten years. Absent major macro shocks that force investors to reassess core assumptions – of solid global growth and gradual disinflation in 2026, policy easing, tariff stability or else – we suspect that this wide dispersion is likely to persist.
ABOUT TRG
Founded in 2002, The Rohatyn Group (TRG) is a global asset manager focused on emerging markets and real assets. Headquartered in New York the firm is comprised of ~100 professionals based in 14 countries across North and South America, Europe, the Middle East, Africa, India, Southeast Asia, and Oceania.
TRG investment capabilities span private and public asset classes focused on emerging markets as well of global forestry and agriculture investments. At the core of our business, we are dedicated to providing specialized investment solutions. Leveraging our global-meets-local approach, on-the-ground coverage, and extensive multidisciplinary investing experience we work strategically to address our clients’ unique needs.
Learn more at: https://www.rohatyngroup.com/
BIOS
Bernard Steinberg
bernard.steinberg@rohatyngroup.com
Bernard is Head of TRG’s Public Markets business and a member of the firm’s Executive Committee. He has over 30 years of experience, including 20 years of fixed income, currency, and derivative trading experience in global emerging markets. Prior to joining TRG in March 2003, Bernard was a Director in Merrill Lynch’s Emerging Markets Group and a Senior Trader with the Royal Bank of Scotland’s Emerging Markets Group. He spent seven years managing a proprietary investment portfolio for Crédit Agricole Indosuez, most recently as a Partner in the firm’s London office, where he oversaw the Local Markets Trading Group, which was responsible for a sizeable portfolio in Latin America and Eastern Europe. Bernard earned a Bachelor of Business Administration degree from Fundação Getulio Vargas Business School in São Paulo, Brazil.
Luis Arcentales
luis.arcentales@rohatyngroup.com
Luishas over 20 years of experience in covering global macroeconomics and markets. He is responsible for formulating market strategy at TRG. Prior to joining TRG, he had a short stint as an independent macro researcher following a nearly two-decade career at Morgan Stanley in New York. In his role as Senior Economist, his primary focus was developing the macroeconomic and politicaloutlooks for countries in Latin America, in addition to publishing on topicsranging from the business cycle to trade dynamics for the region. Luis startedhis career as an equity strategist at McGlinn Capital, a value-oriented assetmanager in Pennsylvania. He holds an MS in Economics and a BA in IndustrialEngineering from Lehigh University; he sits on the board of Lehigh’s MartindaleCenter for the Study of Private Enterprise and is a CFA charter holder.
IMPORTANT INFORMATION – REFERENCES
1 Goldman Sachs Research. (2026, February 20). EM weekly fund flows monitor.
2 TRG calculations based on Bloomberg data as of February 24, 2026.
3 TRG calculations based on Bloomberg data as of February 24, 2026.
4 Goldman Sachs Economic Research. (2023, June 13). What will it take for EM to outperform.
5 TRG calculations based on MSCI data as of February 24, 2026.
** Relative performance of MSCI EM Mid & Large Cap, Net Total Return, USD and MSCI World Mid & Large Cap, Net Total Return, USD.
*** Realized and consensus expected earnings for MSCI EM Mid & Large Cap, USD and MSCI World Mid & Large Cap, Net Total Return, USD.
IMPORTANT INFORMATION – DISCLAIMERS
The information provided herein is for educational and informational purposes only, and neither The Rohatyn Group nor any of its affiliates (together, “TRG”) is offering any product or service hereby. The information provided herein is not a recommendation, offer, or solicitation of an offer to buy or sell any security, commodity, or derivative, nor is it a recommendation to adopt any investment strategy or otherwise to be construed as investment advice. Any projections, market outlooks, investment outlooks or estimates included herein are forward-looking statements, are based upon certain assumptions, and should not be construed as an indication that certain circumstances or events will actually occur. Other circumstances or events that were not anticipated or considered may occur and may lead to materially different outcomes. The information provided herein should not be used as the basis for making any investment decision.
Unless otherwise noted, the views expressed in the content herein reflect those of the authors set forth and are not necessarily the views of TRG. In fact, the views of TRG (and other asset managers) may diverge significantly from certain of the views expressed in the content herein. The views expressed in the content herein are subject to change without notice, and TRG disclaims any responsibility to furnish updated information in the event of any such change in views. Certain information contained herein has been obtained from third-party sources. While TRG deems such sources to be reliable, TRG cannot and does not warrant the information to be accurate, complete or timely, and TRG disclaims any responsibility for any loss or damage arising from reliance upon such third-party information or any other content provided herein.
Exposure to emerging markets generally entails greater risks and higher volatility than exposure to well-developed markets, including significant legal, economic and political risks. The prices of emerging market exchange rates, securities and other assets are often highly volatile and movements in such prices are influenced by, among other things, interest rates, changing market supply and demand, external market forces (particularly in relation to major trading partners), trade, fiscal and monetary programs, policies of governments and international political and economic events and policies. All investments entail risks, including possible loss of principal. Past performance is not necessarily indicative of future performance.
The information provided herein is neither tax nor legal advice. You must consult with your own tax and legal advisors regarding your particular circumstance.
