Goldman Sachs: EM Earnings Drive Rise, H2 Trends to Spread to Cyclical Stocks

Overview

This report is Goldman Sachs' weekly Emerging Markets Kick-off Report, reviewing recent MSCI Emerging Markets Index performance. Although the index ended the week up 1%, volatility increased and the momentum factor made a sharp pullback. The core view holds that the strong performance of emerging markets in the first half was mainly concentrated in tech and AI-related areas. In the second half, with macro background improvement from eased oil prices, cyclical momentum will be rebuilt, leading to an expanded return scope. Based on strong earnings growth expectations (55% expected growth in 2026), institutions maintain an overweight view on emerging markets and conducted industry rotation adjustments, showing favor towards banks, capital goods, and metals/mining, while being less optimistic about energy and internet.

Core views

First Half Concentrated with Earnings Driver: MSCI Emerging Markets Index rose 23% in the first half of 2026, but this gain was highly concentrated in artificial intelligence (AI) and tech-related sectors, with other areas performing poorly. The report emphasizes that earnings were the main driving force behind this rise; MSCI EM forward earnings revision magnitude YTD reached as high as +40%, far exceeding price returns. This indicates the market rise has fundamental support rather than being purely valuation expansion. Second Half Outlook: Expansion Scope and Cyclical Return: Goldman Sachs expects that as oil price relief improves the macro background, cyclical momentum will be rebuilt in the second half, causing return scope to expand from narrow tech stocks to broader sectors. Institutions forecast profit growth of 55% in 2026 and 20% in 2027, which will push the MSCI EM Index to 1,900 points by year-end and 2,000 points over 12 months. While tech-heavy markets like Korea and Taiwan may continue to lead, volatility might increase. Regional and Industry Allocation Adjustments: In terms of industry allocation, the report reflects a more cyclical benchmark, upgrading Banks and Capital Goods to Overweight (OW), upgrading Chemicals to Neutral (MW), while downgrading Energy and Internet to Neutral (MW). Regarding regional selection, besides tech-dominated Korea and Taiwan, the report looks for rebound opportunities in oil-importing countries like India, Turkey, and Egypt. For interest-rate-sensitive markets like South Africa and Brazil, the report believes their retracement relative to gold and rate changes was excessive, and if local rates ease further, recovery opportunities may exist. Additionally, Greece and Hungary are mentioned due to potential structural revaluation.

Analysis framework

Goldman Sachs analysis follows a logic chain of 'Macro Background-Earnings Driver-Valuation/Capital-Allocation Advice'. First, judge macro environment improvement via observing oil price changes and PMI data (e.g., oil price relief benefits oil importers). Second, deeply analyze earnings revision data, pointing out earnings growth is faster than price growth, confirming the fundamental basis of the rise. Next, evaluate market sentiment and risk combining valuation levels (MSCI EM Forward P/E is 10.9x, below 10-year average by 1.2 standard deviations) and capital flows (recent large foreign exit from tech stocks). Finally, conduct industry rotation based on above analysis, shifting from overcrowded tech stocks to cyclical sectors benefiting from macro improvement and reasonable valuations (such as banks, capital goods).

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Differential impact of oil price as key macro variable on different emerging market countries

  Report utilizes oil price changes to analyze differential impacts on oil importer countries (like India, Turkey) and exporter countries; falling oil prices help improve trade conditions and macro environment for importer countries, thereby providing rebound momentum for their stock markets.

• Company Fundamentals & Financial FrameworkEarnings Quality Analysis

  Comparison of Earnings Revision Magnitude and Price Returns

  By comparing forward earnings revision magnitude (+40% YTD) with index price increase, judge whether market rise is driven by fundamental improvement or by valuation expansion, thereby assessing sustainability of the trend.

• Valuation MethodPE/PEG valuation

  Comparison of Forward P/E with Historical Mean

  Use MSCI EM Index forward P/E (10.9x) compared with its 10-year mean and standard deviation to judge current valuation is at historical low, providing safety margin and upside space for the market.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  Momentum Factor Pullback and Market Breadth

  Monitor performance of Momentum Factor, noting it pulled back sharply (-12%) over two consecutive weeks, indicating investors are cutting risk; market style may switch from extreme growth/momentum to more balanced style.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• MSCI EM Index

  Core tracking subject, benefiting from earnings growth and valuation repair

  Strengths

  Valuation at historical lows, strong earnings growth

  Weaknesses

  H1 gain concentrated, insufficient market breadth

  Comparison

  Still has valuation discount compared to developed markets

  Risks

  Decline in global risk appetite, geopolitical conflicts

• Taiwan Stock Market

  Representative of Tech/AI sectors, led gains in H1

  Strengths

  Strong demand for AI infrastructure

  Weaknesses

  Large foreign capital outflows, high valuation

  Comparison

  More driven by AI themes than Korea

  Risks

  Global semiconductor cycle fluctuations, geopolitics

• Korea Stock Market

  Tech-heavy market, recently led declines

  Strengths

  Core position in semiconductor industry chain

  Weaknesses

  High pressure on foreign capital outflows, severe momentum factor pullback

  Comparison

  Similar to Taiwan but more affected by macro economy

  Risks

  Export demand slowdown, exchange rate fluctuations

• India Stock Market

  Oil importer country, beneficiary of macro improvement

  Strengths

  PMI rebound, positive impact of falling oil prices

  Weaknesses

  Relatively higher valuation

  Comparison

  More domestic demand driven characteristics than China

  Risks

  Monsoon weather impact, policy implementation strength

• Brazil Stock Market

  Interest-rate sensitive market, high quality domestic cyclical stocks

  Strengths

  Expectation of interest rate peak, robust domestic circulation

  Weaknesses

  Fiscal concerns, election volatility

  Comparison

  More dependent on domestic consumption than South Africa

  Risks

  Fiscal policy loss of control, global risk aversion

• South Africa Stock Market

  Interest-rate sensitive market, mining dominated

  Strengths

  Rising gold price favors mining sector, interest rates likely to decline

  Weaknesses

  Weak domestic economy, power supply issues

  Comparison

  More dependent on commodity prices than Brazil

  Risks

  Rand exchange rate fluctuations, delayed structural reforms

Key data

• MSCI EM Index Weekly Gain0.8%Weekly performance, Taiwan and Thailand led gains (+5%), Korea led declines (-6%)
• MSCI EM Index H1 Gain23%Cumulative gain in first half of 2026
• Forward Earnings Revision Magnitude (YTD)+40%Year-to-date earnings revision magnitude, exceeding price returns
• 2026/2027 Profit Growth Rate Forecast55% / 20%Forecast for overall emerging market profit growth by Goldman Sachs
• MSCI EM Forward P/E Ratio10.9xBelow 10-year average by 1.2 standard deviations
• Foreign Outflow Volume (Weekly)USD 16 billionMainly flowing into tech-heavy Korea (12.9 billion) and Taiwan (3.5 billion)
• Momentum Factor Pullback-12%Cumulative pullback magnitude over latest two weeks
• MSCI EM Year-End Target Level1900Goldman Sachs forecast value

Impact & implications

For investors, the report implies structural differentiation within emerging markets will continue, but focus may shift from pure tech stocks to cyclical value stocks. Overweight ratings on banks and capital goods indicate institutions favor beneficiaries of initial economic recovery. Investors holding Korean and Taiwanese tech stocks should beware of high volatility and foreign capital outflow risks; for investors focusing on Indian, Brazilian, South African markets, current time may be a window to build positions for rebounds or recovery trends. Continued stability or decline in global oil prices will be a key external positive factor.

Risks

• Sudden drop in global risk appetite causing continued foreign capital outflows from emerging markets
• Unexpected significant rise in oil prices damaging macro prospects for oil importing countries
• US monetary policy tightening exceeds expectations, triggering USD strengthening
• Escalation of geopolitical conflicts affecting global supply chains and trade
• China economic growth recovery intensity falls short of expectations, dragging down neighboring economies

What to watch

• Whether MSCI EM Index can achieve style diffusion from tech stocks to cyclical stocks in the second half
• Changes in PMI and inflation data for oil importing countries like India and Turkey
• Interest rate decision paths of central banks in South Africa and Brazil
• Whether foreign capital flows to Korea and Taiwan markets stabilize
• Global oil price trend and its impact on trade conditions for emerging markets