Emerging Market (EM) stocks in 2025 outperformed the S&P 500 for only the second time in the past decade, and the third time since the end of the China/commodity boom in 2012. Since that boom ended, total returns have been 510% for the S&P 500 compared to a miserable 83% for EM. This period has been defined by a remarkable phase of “American Exceptionalism,” while major emerging markets—with the notable exceptions of India and Taiwan—have been marked by malaise, torpor, and an extraordinary consistency in destroying shareholder capital. So, why should we be bullish on EM stocks now?
First, we can start with a technical argument based on recent trends and historical patterns. Second, in a later blog,we can speculate on the status of “American Exceptionalism” and its implications for asset prices.
The Technical Argument
- Momentum: Relative performance between EM and the S&P 500 historically trends for multiple years. Therefore, the significant outperformance EM saw in 2025 (33.5% vs. 17.3%) is, in itself, a strong reason to be optimistic about positive returns in 2026. This is particularly true for the MSCI EM ex-China index, which has significantly outperformed the broader MSCI EM index for the past 10 years and continued to do so in 2025, despite the recovery of China’s tech sector.
- The U.S. Dollar: A weakening U.S. dollar is historically highly correlated with positive EM stock returns. A weaker dollar stimulates economic activity and trade outside the U.S. by lowering debt-servicing and trade-financing costs and increasing the affordability of dollar-priced commodities. The dollar fell by 8% in 2025, as measured by the DXY index, and is now down by over 10% since its peak in October 2022. If the dollar is entering a typical down cycle, it could continue to weaken for several years. Two factors make this plausible: first, the Trump Administration is unique in its desire for a weaker currency to promote U.S. reindustrialization; second, the current trend of global de-dollarization is manifesting in rising gold prices and China’s determination to reduce dollar hegemony.
- Commodity Prices: The Industrial Metals Index and copper prices are historically highly correlated with EM stock prices. This connection is driven by three primary factors: the revenue dependence of commodity-exporting nations, industrial demand from manufacturing giants like China, and an inverse relationship with the U.S. dollar. As the charts below show, both indices have been rising sharply, supporting a continuation of the EM rally.
A Few Words of Caution
Several factors may still weigh on the bullish case for EM stocks:
- U.S. GDP Resilience: U.S. growth continues to surprise to the upside, largely due to the persistence of the tech sector. Relatively high U.S. growth attracts capital from the rest of the world, which is typically bearish for EM assets.
- Soft Commodity Prices: Weak prices for oil and agricultural commodities are deflationary, which is generally not supportive of EM stocks.