Emerging market equities edge higher amid rate volatility as earnings beats support risk assets

Overview

This report is Goldman Sachs' weekly emerging market strategy research published on 2026-05-22, with a focus on sharp moves in US rates, the progress of the emerging market earnings season, regional market performance, fund flows, and valuation. The report notes that MSCI EM rose 1% in a week of heightened volatility, but internal dispersion was significant: Korea performed strongly on the back of technology, Indonesia and Turkey fell sharply on political concerns, and Chinese equities were weighed down by April activity data that came in weaker than expected.

Core views

The report's core view is that emerging market equities face near-term valuation pressure from a sharp rise in US yields, but as long as the global and US growth backdrop remains firm, the market can still absorb an orderly rise in rates. The current US 10-year yield at 4.6% is already near the historical stress zone, and if it moves materially higher again, a deeper pullback is possible. At the same time, C1Q26 earnings have clearly beaten the initial season expectations, especially in North Asia technology-linked earnings in Korea and Taiwan, and AI-driven earnings momentum remains an important support for emerging market equities.

Analysis framework

The report uses a cross-asset and regional comparison framework, combining US nominal and real rates, MSCI EM price returns, regional and sector earnings tracking, valuation percentiles, fund flows, and historical rate shock case studies to assess the vulnerabilities and relative opportunities for emerging market equities. For Brazil, it also combines local rate sensitivity and historical election-cycle performance to evaluate the impact of rates and political events on the market.

Methodology notes

• Macro rate sensitivityUS 10-year yield shock analysis

  Measure the intensity of rate shocks using the level of the US 10-year nominal yield and the standard deviation of its monthly change, and observe the historical returns of MSCI EM across different rate-move ranges.

  The report points out that the current US 10-year yield is 4.6%, with a monthly increase of about 1.8 standard deviations, close to the historical threshold where valuations and prices in emerging markets come under pressure; if the move exceeds 2 standard deviations, MSCI EM returns have historically weakened materially.

• Earnings trackingC1Q26 EPS tracking

  Compare pre-season consensus expectations with the tracking estimate formed from reported company results to judge whether earnings are beating expectations.

  About 80% of MSCI EM companies and about 90% of market cap have reported C1Q26 results, and EPS growth tracking is about 39% year over year, above the market consensus of about 28% at the start of the season, driven mainly by North Asia technology, Greek banks, and Brazil energy.

• Valuation and fund flowsNTM P/E, fund flows, and regional allocation

  Assess risk/reward through forward 12-month P/E, standard deviations versus historical averages, GEM fund flows, and market/sector allocation preferences.

  MXEF currently trades at about 11.4x NTM P/E, about 0.8 standard deviations below the 10-year average; however, short-term fund flows show heavy selling in emerging market equities, especially notable outflows from Korea.

Asset mapping & comparison

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

• MSCI EM / MXEF

  Core coverage asset

  Strengths

  Valuation is below the 10-year average, C1Q26 EPS tracking growth is 39% and above expectations, and global growth plus AI-related earnings momentum provide support.

  Weaknesses

  Sensitive to a rapid rise in US yields; the recent equity-rate correlation has turned negative, and fund flows show clear selling pressure.

  Comparison

  Compared with US equities, emerging market equities still trade at a valuation discount; relative to history, MXEF is around 11.4x NTM P/E, about 0.8 standard deviations below the 10-year average.

  Risks

  US 10-year yields break above the stress threshold again, global growth slows, fund outflows continue, and earnings upgrades fail to persist.

• Korean stocks

  Leading performance and driven by tech earnings

  Strengths

  High technology exposure, up about 6% on the week, with North Asia technology a major contributor to C1Q26 earnings upgrades.

  Weaknesses

  Significant fund outflows, with about $8.8 billion leaving Korea during the week; Korean domestic demand is one of the earnings drags.

  Comparison

  Led regional performance this week, outperforming most other emerging markets.

  Risks

  A sharp rise in US rates, valuation pressure on long-duration technology, and a reversal in fund flows.

• Chinese stocks

  Relatively defensive, but with weak fundamental data

  Strengths

  Historically more defensive during sharp US yield increases; Goldman Sachs still maintains an overweight preference for China among large EM markets.

  Weaknesses

  Chinese equities were under pressure due to weaker-than-expected April activity data; Chinese domestic demand is a drag on C1Q26 EPS growth.

  Comparison

  Compared with ASEAN, LatAm, and South Africa, China has historically been more defensive during yield shocks.

  Risks

  Economic activity data continues to miss expectations, domestic-demand earnings drag widens, and policy support falls short of expectations.

• Brazilian stocks

  Rate-sensitive and election-cycle focus market

  Strengths

  Goldman Sachs still maintains an overweight preference for Brazil among large EM markets, with Brazil energy contributing to earnings upgrades; current valuation is reasonable relative to historical election cycles.

  Weaknesses

  Brazilian equities have a relatively high negative correlation with local rates within EM, so rising local rates weigh on performance.

  Comparison

  More sensitive to local rate changes than other EM markets; performance has varied significantly across election cycles.

  Risks

  Higher local rates, election uncertainty, a reversal in foreign inflows, and political risk.

• Indonesian and Turkish stocks

  Short-term weak markets driven by political risk

  Strengths

  If political risk eases and global growth stays firm, there is room for valuation recovery.

  Weaknesses

  Both fell about 8% and 6% this week, with selling driven by political concerns; Indonesia also unexpectedly raised rates by 50 bp and announced a concentrated export plan.

  Comparison

  Clearly lagged within MSCI EM this week.

  Risks

  Persistent political risk, policy uncertainty, rate pressure, and foreign outflows.

Key data

• MSCI EM weekly performance+1%Closed higher during a week of sharp moves in US bond yields.
• Korea market performance+6%Led emerging markets, supported by a heavy technology weighting.
• Indonesia market performance-8%Among the largest declines due to political concerns.
• Turkey market performance-6%Fell sharply due to political concerns.
• US 10-year yield4.6%Near the historical stress zone of 4.5%-5%.
• Monthly move in US 10-year yield1.8 standard deviationsClose to the historical risk threshold of 2 standard deviations.
• MSCI EM C1Q26 EPS tracking growth39% y/yAbove the market consensus of about 28% at the start of the season.
• Reported earnings coverageAbout 80% of companies, about 90% of market capUsed to gauge progress in the C1Q26 earnings season.
• MXEF valuation11.4x NTM P/EAbout 0.8 standard deviations below the 10-year average.
• EM 2026E EPS weekly revision+1%Earnings expectations were revised higher over the past week.
• Emerging market equity fund flows-$9.9bn/weekMainly driven by outflows from technology-heavy Korea.
• Korea fund flows-$8.8bnThe main source of emerging market outflows during the week.
• Taiwan fund flows+$100mStill recorded a modest inflow despite the broader outflow backdrop.
• Earnings beat ratio32%The share of earnings beats was slightly above the 30% share of misses.
• Sales beat ratio55%Sales beats were broad, but the report warns that rising input costs are pressuring margins.

Impact & implications

For investors, the key issue for emerging market equities is not just the level of yields, but the combination of the speed of yield increases and growth resilience. When rates rise in an orderly manner and growth remains strong, emerging market equities can still perform well; but if US yields continue to surge rapidly, valuations and long-duration assets will face greater pressure. Regionally, rate-sensitive or long-duration segments such as Indonesia and the Philippines in ASEAN, Brazil and South Africa in LatAm, and North Asia technology are more vulnerable to shocks; China and MENA have historically been more defensive during rate shocks. On earnings, AI and North Asia technology remain the key themes supporting EM, but weaker China activity data, domestic-demand drags, and fund outflows need to be monitored closely.

Risks

• US 10-year yields rise rapidly again and break above the threshold historically unfavorable for emerging market returns.
• The stock-rate correlation remains negative, causing rising yields to directly pressure valuations and risk appetite.
• Chinese activity data continues to come in weaker than expected, weighing on Chinese equities and overall EM earnings expectations.
• Political risk or election uncertainty intensifies in markets such as Indonesia, Turkey, and Brazil.
• Emerging market fund outflows continue, with even larger redemptions in technology-heavy markets such as Korea.
• Rising input prices squeeze margins, preventing sales beats from fully translating into earnings beats.
• AI and North Asia technology earnings momentum slows, weakening the main support for current EM EPS upgrades.

What to watch

• Whether the US 10-year yield stays above the 4.5%-5% stress zone, and whether the monthly move breaks above 2 standard deviations.
• Whether global and US growth data can remain resilient enough to support orderly rate increases.
• The remaining C1Q26 MSCI EM earnings reports, especially North Asia technology, Chinese domestic demand, Korean domestic demand, Brazil energy, and Greek banks.
• Whether EM 2026E EPS continues to be revised higher or starts to show slowing earnings momentum.
• Flows into Korea, Taiwan, and GEM funds overall to judge whether recent outflows persist.
• Chinese monthly activity data, policy responses, and how the equity market prices the weak data.
• Brazil's local rate path, market performance tied to the election cycle, and foreign inflow trends.
• Policy and fund flow changes in politically riskier markets such as Indonesia and Turkey.