Emerging Markets Trade at Deepest U.S. Discount Since 2006

The mismatch is being driven in part by technology, where emerging-market suppliers are benefiting from the AI buildout even as investors question whether spending on the theme can keep rising indefinitely. Semiconductor and hardware makers across Asia are feeding cloud infrastructure demand in the U.S., helping lift earnings expectations for the MSCI EM index by 70% this year. Asia’s earnings-per-share forecasts have climbed 87%, while Latin America’s are up 28%, underscoring that the profit story is broadening beyond a single region.

The valuation argument is especially strong in information technology, where the MSCI EM tech subindex has gained 63% in earnings expectations, versus 23% for U.S. tech. That gap reflects rising profit forecasts for major chipmakers such as Taiwan Semiconductor Manufacturing Co. and other suppliers that sit near the center of the AI supply chain. For investors, the point is not just that emerging markets are cheap; it is that they are cheap at the same time as their earnings trajectory is improving faster than developed-market peers.

That has left many fund managers seeing a setup in which price action has lagged fundamentals. Technicals in U.S.-listed emerging-market ETFs have softened recently, with the EEM, VWO and IEMG funds all trading below their 50-day moving averages and showing weak relative momentum, a sign that the rally has cooled even as the longer-term valuation case has improved. The S&P 500, meanwhile, looks expensive by comparison and is still carrying the burden of stretched mega-cap multiples.

The macro backdrop also helps explain why the discount persists. With U.S. 10-year yields still near 5% and the Treasury curve only modestly inverted, investors have remained selective about whether to rotate out of U.S. assets and into riskier markets. A stronger dollar would usually be a headwind for emerging markets, but Adalytica’s U.S. dollar trade snapshot shows neutral sentiment and sharply lower awareness, suggesting the currency’s recent pullback may be easing one of the main pressures on developing-world assets.

The bull case is straightforward: if earnings continue to outrun expectations, the discount should narrow and capital could return to emerging markets that historically outperform after periods of wide valuation gaps. The bear case is that cheap stocks can stay cheap if global growth weakens, AI capex disappoints, or foreign investors continue to prefer the liquidity and perceived safety of U.S. equities.

For now, the market is pricing in a rare combination of stronger profits and lower multiples in emerging markets. That is exactly the kind of disconnect long-term investors tend to chase — and the one they often wish they had bought before the gap closed.