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It has been another strong year for U.S. Equities, as the bull market that began in late 2022 is now in its fourth year.

But while the S&P 500 has returned nearly 16% in 2025, it pales in comparison to another equity asset class – emerging markets.

Emerging market stocks, as measured by the MSCI Emerging Markets Index, have returned about 33% so far this year, making it the top equity asset class this year. Only commodities, like gold, have performed better this year.

It has been the best year for the index since 2017 when it returned 37%.

Which countries are driving the EM returns?

The MSCI Emerging Markets Index consists of stocks from 24 emerging market countries, with China the largest, accounting for about 28% of the portfolio.

Chinese stocks have been a big driver of returns, as according to an analysis by BlackRock, Chinese equities had returned 33% through November. Other countries that make up the EM index are Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

Another huge driver has been South Korea, which represents about 12% of the index. Stocks from that nation have returned about 63% YTD, fueled by the massive by the world’s two leading memory chip makers, Samsung and SK Hynix.

Stocks from Peru have returned a whopping 72% this year, driven by the demand for copper. Peru is the second largest producer of copper and copper prices have increased as it is used for energy applications and AI infrastructure.

In addition, the Central European nations of Hungary and the Czech Republic have also performed well. Stocks from Hungary have returned 75% YTD while Czech stocks have returned about 70%. They were both driven by gains in the energy and banking sectors.

In addition, stocks from Brazil, which makes up 5% of the MSCI EM Index, have gained roughly 58% YTD. Brazilians stocks have been buoyed by interest rate cuts and agricultural exports – among others.

The outlook for 2026

There have been several broad factors that have propelled emerging markets, starting with valuations. Emerging market stocks are a relative bargain compared to U.S. stocks, which has attracted a lot of institutional index. Even with the 33% surge this year, the emerging markets index has a P/E ratio of 16 and a forward P/E of around 13 – both of which are well below the valuations for U.S. large caps.

In addition, a weaker US dollar has helped emerging markets, as many emerging market economies and companies borrow money in US dollars, so when the dollar is weaker, the debt burden is reduced.

Also, emerging markets have benefited form the tech and AI boom as the largest EM companies – Taiwan Semiconductor, Tencent Holdings, Alibaba, Samsung, and SK Hynix are major players in their respective industries and profiting from the AI boom.

Many of these trends should continue to lift emerging market stocks in 2026. JP Morgan recently came out with its outlook for 2026, and the asset manager is bullish on emerging markets.

“EM equities are positioned for robust performance in 2026, boosted by lower local interest rates, higher earnings growth, attractive valuations, ongoing improvements in corporate governance, healthier fiscal balance sheets and resilient global growth,” JP Morgan analysts said.

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