Weekly Market Commentary | Five Reasons the Run in Emerging Markets Could Continue | February 9, 2026

PRINTER FRIENDLY VERSION

After a stellar 2025 in which emerging market (EM) equities returned 34%, 2026 is off to a good start with the MSCI EM Index up 7% year to date. Last year’s near doubling of the S&P 500 return was driven mostly by a weakening U.S. dollar, which propped up EM returns, but attractive valuations and artificial intelligence (AI) investment played a role. This week we highlight five reasons we’ve warmed up to EM.

#1: U.S. Dollar Looks Like It Wants to Go Lower

Given the dollar was one of, if not the biggest drivers of EM outperformance last year, we’ll start there. The U.S. Dollar Index is on the cusp of breaking a long-term uptrend. Further weakness would potentially introduce 5% downside or more from a technical analysis perspective. Prospects for two more rate cuts from the Federal Reserve (Fed) and a Trump Administration comfortable with a weaker (but stable) dollar to help balance trade increase the likelihood of a breakdown in the currency at some point.

In addition, in a sanction-heavy geopolitical environment that kicked into high gear when Russia invaded Ukraine, central banks around the world have looked to diversify away from the greenback — the rally in gold over the past couple of years provides evidence. Finally, there is a structural anchor on the dollar in the still large — but slightly shrinking — trade deficit with the rest of the world. The more the U.S. spends on imports, the more global supply of dollars there is to weigh on its price based on supply and demand.

One risk to our bearish dollar bias is sticky inflation, which could delay Fed rate cuts. We could also get a technical bounce off 96 due to potential safe haven buying if economic and market conditions worsen (not our base case). A dollar bounce could also come from the incoming Fed Chair signaling a more hawkish bias.

U.S. Dollar Is on the Cusp of a Major Technical Breakdown

_{Source: LPL Research, Bloomberg 02/05/26
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.}

#2: Earnings Growth Is Accelerating

Our hesitation to jump on the EM bandwagon until our upgrade to neutral in early 2025 was centered on earnings. We would attribute much of the EM underperformance since the 2008–2009 Global Financial Crisis to earnings disappointment (though a strong U.S. dollar was another meaningful piece of the story). Year after year, EM fell short of optimistic earnings expectations. In fact, the consensus estimate for EM earnings per share (EPS) this year of around $90 is the same level as 2011, while EPS for the S&P 500 is up over 170% over the same time period.

So, is this time different? These may be the most dangerous words in investing, but we believe it may be. AI is a big reason why. Earnings for EM are expected to outgrow the U.S. and developed international markets (represented by the MSCI EAFE) this year — and there probably isn’t enough time for that to change given we’re in fourth quarter earnings season. For the record, EM earnings are tracking to 16% in the fourth quarter, slightly ahead of the U.S. at 13%.

In 2026, EM earnings are expected to grow 29%, more than double current earnings growth expectations for the U.S. at 14%. EM may miss those lofty expectations, but the avalanche of AI investment in Asia and increased focus on corporate governance, efficient capital allocation, and shareholder returns, including in China, South Korea, and India, position EM earnings and cash flows to potentially outgrow the U.S. as well as Europe and Japan in 2026.

EM Earnings Growth Is Strong and Getting Stronger

Earnings growth (YoY, %)

_{Source: LPL Research, FactSet 02/05/26
Disclosure: Earnings data based on MSCI EAFE, MSCI Emerging Markets, and S&P 500 Indexes. All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.}

#3: Exposure to AI Boom in Asia

In what may be a surprise to some, the MSCI EM Index has as big an allocation to the technology sector as the S&P 500 at slightly over 30%. Not only is EM a play on AI, as China has made advances and is well positioned to benefit from the new technology, but much of the AI chips and hardware needed for AI data centers comes from Asia.

Emerging Markets Index Is As Tech Heavy As the U.S.

As the accompanying chart illustrates, much of the heavy technology weighting in the EM index comes from Asia, where the top country weightings are China, Taiwan, Korea, and India.

The Overwhelming Majority of the EM Index is Based in Asia

#4: Technical Analysis Trends Are Compelling

Emerging markets opened 2026 with sustained momentum and notably low volatility…

EM Has Broken Out on an Absolute and Relative Basis

#5: Attractive Valuations

We point out all the time that valuations are not good timing tools…

Conclusion

We maintain our positive bias toward EM. LPL Research suggests investors maintain EM equities exposure at least in line with their targets and think about finding some dry powder to add more.

Asset Allocation Insights

LPL’s STAAC maintains its tactical neutral stance on equities…

Jeffrey Buchbinder, Chief Equity Strategist, LPL Financial

Adam Turnquist, Chief Technical Strategist, LPL Financial

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• The Productivity Advantage: Powering Economic Growth in 2026
• Unearthing the Metals Melt-Up

Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This research material has been prepared by LPL Financial LLC.

RES-0006657-0126 | For Public Use | Tracking #1061925 (Exp. 02/2027)

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