Emerging-market stocks are heading for their strongest stretch of earnings growth since the 2002-04 super-cycle, powered by a surge in artificial-intelligence investment that is reshaping the asset class, according to Morgan Stanley.
That’s in “sharp contrast to the past decade,” when second fiscal-year estimates were on average revised lower from initial levels, strategists led by Jonathan Garner wrote in a note.
The shift matters for investors weighing whether emerging-market stocks can extend their outperformance over US peers this year. It also highlights rising concentration risk, with chipmakers dominating upgrades and reshaping the earnings narrative away from consumption and old-economy sectors.
In what they describe as a “highly unusual cycle,” earnings estimates for this year for the MSCI Emerging Markets Index in their base case have risen 6.5% on average. Yet the strength is strikingly concentrated. The strategists said the entire upgrade has been driven by three firms, Samsung Electronics Co., SK Hynix Inc. and Taiwan Semiconductor Manufacturing Co.
Garner and his team have previously flagged key turning points in emerging-market equities. In the first week of October 2022, they upgraded the asset class, saying they saw signs it was bottoming. By the end of that month, the MSCI EM Index had reached its low.
Morgan Stanley raised its year-end target for the EM gauge to 1,700 from 1,400, implying about a 5% gain from Thursday’s close. The firm’s new base case sees December 2026 earnings per share for the gauge at $118, up 33% year-on-year, followed by $131 in December 2027, an 11% increase.
The EM earnings upswing, however concentrated, comes even as China’s reporting season stays muted, with weak domestic demand and Baidu Inc.’s third straight quarterly revenue drop highlighting how some Chinese tech giants are struggling to find their footing in the AI race. India, by contrast, is showing tentative signs of a recovery in corporate profits.
“In our near 30 years covering EM, we cannot recall a time when a single sector (semis and specifically memory) and to only a slightly lesser extent one market (Korea) were so dominant within the asset class,” the strategists wrote.
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