Analysts say that Emerging Market equities could outperform US stocks, despite a slowdown across EM economies.

In the 2010s, emerging market economies grew at an average annual rate of 5.3 per cent, compared to just 1.8 per cent in advanced economies. But since 2020, there has been a marked slowdown in EM growth, which could average just 2.3 per cent for the remainder of the year.

Analysts at JP Morgan see a stark slowdown in growth for EM economies in the second half of this year, as tariffs are expected to be felt keenly by exporters. EM market growth is in no small part fuelled by exports, and efforts by the US and other modern economies to reshore manufacturing capacity are expected to come at the expense of countries like Vietnam, Bangladesh, and Mexico.

In JP Morgan’s mid-year outlook, analysts at the bank said: “Evolving US policy is expected to continue dominating the outlook for emerging markets (EM) in the second half of 2025…

“EM growth is forecast to slow to a 2.3 per cent annualised rate (ar) in the second half of 2025, down from 3.9 per cent in the first half.”

It comes despite a retreat from Liberation Day tariffs, because even after a partial climbdown, US tariffs will still be significantly higher than they were before Trump assumed office in January.

EM exports to the US could suffer further as a result of dollar weakness. JP Morgan analysts expect EM currencies to continue to appreciate against the greenback this year, meaning for Americans, imported goods could become more expensive.

However, while EM economies are expected to slow down, EM equities are forecast to outperform US equities this year. Rotation out of US assets has been a tailwind for EM equities, which, according to analysts at Franklin Templeton, remain “under-owned, undervalued and underappreciated.”

Over the last decade, EM economies have put on impressive growth, but their markets have often lagged. Since 2015, the MSCI Emerging Markets is up 57 per cent, compared to 238 per cent for the S&P 500. But some analysts think this trend could be put into reverse, with EM economies slowing and equities coming into their own.

Analysts at East Capital now say EM equities are “becoming increasingly difficult to ignore.” In a June analysis, the asset manager said EM equities should continue to benefit from a weak US dollar:

“A weaker dollar naturally benefits emerging markets, not least because, historically, there has been a strong inverse relationship between dollar strength and emerging market outperformance…

“Going forward, policy uncertainty in the US, interest rate cuts and a reduction of strong financial inflows should mean the US dollar will remain relatively weak. This would be a significant tailwind for emerging markets.”

And not all forecasters are especially bearish on EM economic growth. In their most recent analysis, S&P Global predicts an average of 4.2 per cent this year across EM economies, well down on the 5.5 per cent average we saw in the 2010s, or the 7 per cent in the noughties – but still well ahead of modern economies. The report predicted weak growth in Latin America of just 2 per cent, but resilience in Asia, which is expected to grow by 4.6 per cent this year.

Is There an Opportunity in Emerging Market Equities?

It’s against this backdrop that some analysts think there could be a potential opportunity in EM equities. With the greenback under pressure, investors rotating out of US assets and uncertainty weighing on growth, some analysts see EM equities as underpriced.

Analysts at Bank of America have said the prevailing conditions, namely a weak dollar, mounting US debt, and Chinese economic resilience, conspire to the benefit of EM equities. In a note seen by CNBC, analysts at the bank said:

“Weaker U.S. dollar, U.S. bond yield top, China economic recovery…nothing will work better than emerging market stocks,”

It came after analysts at JP Morgan upgraded their EM equities outlook from neutral to overweight in May. Speaking to the outlet, Malcolm Dorson, head of the active investment team at Global X ETFs, said:

“After underperforming the S&P over the past decade, EM equities are uniquely positioned to outperform over the next cycle,

“This possible perfect storm stems from a potentially weaker US dollar, extremely low investor positioning, and outsized growth at discounted valuations.”

In a July report, analysts at Van Eck also pointed toward a dynamic in which the US dollar’s confidence crisis boosts EM equities: “Emerging markets are entering a more favourable phase, supported by a weakening U.S. dollar, fading U.S. exceptionalism, and renewed investor interest,

With momentum building around AI infrastructure, digital consumption, and financial inclusion—and valuations still attractive—we see a growing case for selective, fundamentals-driven exposure to EM equities in a recalibrating global landscape.”

And analysts at JP Morgan say: “EMs should not be overlooked as potential portfolio diversifiers.”

However, not everyone is bullish on EM stocks. Analysts at Wells Fargo say they ‘may continue to rise but will lag their US peers’, MarketWatch reports, with the outlet reporting:

“Wells Fargo favours the more predictable and stable political and regulatory approach of developed markets, and its recommendation is to trim equity exposure to the asset class and reposition more positively toward the U.S. and developed markets more broadly.”

And in a July article for Investing.com, Brian Gilmartin at Trinity, said EM stocks only deliver modest returns over a long-time horizon, because of unpredictable governance, writing:

“After what China did to Jack Ma and Ant Financial in 2020, it’s difficult to own any China stock market exposure directly. Basically, Xi Jinping made a personal decision to shelve the Ant Financial IPO late in 2020, after a speculative frenzy around the company.”

Although Gilmartin said EM stocks were both “under-appreciated and under-invested”, he notes “most non-US asset classes have been tough to find anything other than average returns for 15 years.”

 Are Emerging Market Stocks Underbought?

As of mid‑July 2025, the valuation gap between emerging‑market and US equities remains wide. As of July 17, 2025, the MSCI Emerging Markets ex‑China Index’s 12‑month trailing P/E stood at 15.97×, while the S&P 500’s forward P/E was 22.43× as of July 18, 2025, leaving a gap of roughly 6.46 P/E points, one of the largest differentials observed in the past decade.

While EM economies are expected to slow, EM companies are forecast to deliver about 13 per cent EPS growth in 2025, based on MSCI EM’s 12‑month forward EPS rising from USD 81.4 to USD 92. By contrast, US large‑caps are estimated to see around 9 per cent earnings growth next year, according to Silvercrest’s 2025 market outlook.

Structural tailwinds support the case for emerging markets. China’s corporate RoE recovery is expected to drive 15 per cent EPS growth in 2025, broadening from tech into industrials and consumer sectors. Meanwhile, EM’s rising technology weight—now about one‑third of the MSCI EM Index—benefits from the global AI supply chain and ongoing capex, reinforcing earnings momentum.

In May 2025, JP Morgan upgraded EM equities from “neutral” to “overweight,” citing both the attractive valuation gap (12.4× forward P/E in EM vs. 19.1× in developed markets) and a softer U.S. dollar as key drivers.

Key Risks & Catalysts for Emerging‑Market Equities

Emerging‑market economies are looking down the barrel of pronounced deceleration in growth —JP Morgan’s mid‑year outlook forecasts EM GDP to slow to a 2.4 per cent annualised pace in H2 2025, down from 3.9 per cent in H1 2025, as tariff pressures and weaker external demand weigh on export‑driven markets. And yet capital is quietly rotating back into EM equities—driven by a weak US dollar and the search for value beyond large‑cap American stocks.

Some analysts believe EM equities remain underpriced. As of July 17, 2025, the MSCI Emerging Markets ex‑China Index traded at a 12‑month trailing P/E of 15.97×, while the S&P 500’s forward P/E sat at 22.43× on July 18, 2025, leaving a discount of roughly 6.46 P/E points, one of the most pronounced gaps of the past decade.

The S&P 500’s top ten names now trade at a 12‑month forward P/E of around 25×—higher than during the late‑1990s dot‑com boom. Right now, AI is delivering massive gains, but some fear the bull run could “melt up” as the S&P 500 notches one record after another.

Against this backdrop, some analysts believe EM equities look compelling. Several analysts predict muted gains for US stocks this year, including UBS, which has trimmed its 2025 S&P 500 earnings outlook to imply roughly 6 per cent growth year‑over‑year. Investors are increasingly looking further afield for opportunities to increase ROI and hedge against volatility.

A “perfect storm”, as one analyst put it, of tariff pressures and weaker dollar dynamics has created what some argue is an attractive entry points for EM equities. With US large‑caps trading at historically expensive valuations—and concerns mounting over a potential bubble—emerging markets potentially offer both valuation upside and portfolio diversification. EM bulls say that those who position selectively in EM today may well capture outsized returns as the P/E gap narrows and fundamentals reassert themselves.

Emerging Market Stocks 2025: Poised to Outperform Amid Slowdown

Despite slowing economic growth, emerging market stocks are gaining investor attention in 2025. Analysts point to a “perfect storm” of catalysts, including a weaker US dollar, low valuations, and capital rotation out of U.S. equities, as driving renewed interest in EM equities. While EM GDP is forecast to decelerate, earnings growth is expected to outpace that of US large caps, with a wide P/E valuation gap offering potential upside. As US markets trade near historical highs, many view EM stocks as under-owned, underpriced, and increasingly attractive for diversification and long-term returns.