Emerging Markets Equity Strategy and 2Q26 earnings Report Interpretation

Overview

This is J.P. Morgan's 2Q26 earnings review for emerging-market equities. It concludes that technology and AI infrastructure remain the central earnings engine, while improving results in cyclicals and selected regional sectors are broadening the earnings base; the institution remains constructive on EM equities over the medium term.

Core views

J.P. Morgan characterizes 2Q26 as a very strong EM earnings season. Reported EM net income increased 80% year on year, alongside 22% top-line growth and 44% EBITDA growth. Technology was the dominant contributor, with earnings up 347% year on year; Korea and Taiwan delivered particularly strong results, with net income growth of 499% and 117%, respectively. EM Asia led regional earnings growth at 86%, while Latin America grew 44% and CEEMEA 34%, both above expectations. MSCI EM revision breadth turned positive in August after remaining negative since December 2025, indicating that upward EPS revisions had begun to outnumber downward revisions. The report maintains that the EM technology and AI complex should remain the core earnings trade. Its argument rests on a persistent demand-supply imbalance in Asia technology hardware and continued AI capital expenditure. Nvidia's indicated FY2028 revenue growth of 70%, versus a mid-40% expectation, is viewed as supporting a stronger 2027 data-center order outlook and additional memory-value growth. This compares with a 43% year-on-year forecast increase in 2027 gross capex by the four major US hyperscalers. Memory suppliers Samsung Electronics and SK hynix cited continued tightness, elevated prices and long-term agreements, supporting J.P. Morgan's higher-for-longer multi-year memory earnings thesis; it cites an estimated FY26E-28E EPS CAGR of about 26% for the memory sector. Taiwan's foundry and semiconductor supply chain provides further evidence for the thesis. TSMC reported better-than-expected 2Q earnings, with operating margins above 60% for the first time, upgraded its 2026 revenue-growth guidance to more than 40% year on year and raised 2026 capex to US$60-64 billion. Management's AI-demand visibility now extends into 2029-30, according to the report. J.P. Morgan sees tight supply across leading-edge foundry capacity, advanced packaging, substrates and increasingly PCBs. It expects Nvidia's strong forecast to lift demand expectations for upstream suppliers and ODMs over coming quarters. TSMC is expected to sustain utilization above 100% through at least 2028, while mature-node foundries benefit from firmer AI-adjacent demand and pricing, although depreciation from capex and weak consumer demand may constrain the longer-term margin recovery of UMC and SMIC. China's earnings picture remains divided. The AI ecosystem, biotech and innovative healthcare are described as robust, whereas domestic-demand-sensitive consumer staples and mass-market property remain soft. In AI infrastructure, J.P. Morgan highlights improving margins at NAURA, projected 2026-28 sales and earnings CAGRs of 45% and 76% for AMEC, and stronger domestic OSAT momentum from tight supply, localization, price increases and advanced-packaging investment. Tencent's 2Q26 non-IFRS operating profit increased 19% year on year, although AI spending absorbed profit gains and led to expected negative free cash flow. Alibaba's AI Cloud and Compute revenue accelerated 45% year on year, with an approximately 12% margin and AI product revenue of RMB12.4 billion, or roughly RMB50 billion annualized; the report regards this as an early proof point for a cloud re-rating. Baidu's increased capex drove free cash flow to negative RMB8.0 billion and compressed margins, despite positive GPU Cloud and Apollo Go developments. The report also finds evidence of earnings broadening. Korea showed strong results in Industrials, Healthcare and Consumer Staples in addition to IT, with 40% of companies beating expectations and 30% missing. India delivered 5% year-on-year net-income growth in US-dollar terms and 16% in rupee terms, supported by resilient domestic demand, record peak power demand of about 271GW, capex and grid investment, defence, autos and a volume-led consumer-staples recovery. Management teams generally emphasized profitable growth, calibrated pricing and margin discipline rather than aggressively raising full-year guidance. In India consumer sectors, J.P. Morgan sees FY27 revenue growth accelerating to around 13%, led by food and beverage. Commodity and energy strength drove much of the improvement in Latin America and CEEMEA. Brazil's earnings grew 50% year on year, with Energy up 123%, supported by Petrobras, Prio and fuel distributors. Saudi Aramco's net income rose 42% year on year, benefiting from operational flexibility including the East-West pipeline and Yanbu hub. The report says constrained crude and refined-product supplies, low fuel inventories and disruptions related to the Strait of Hormuz crisis have supported the energy complex. However, it expects oil and chemical balances to ease through 2H26-2027 if the crisis is resolved, while viewing refining and downstream fundamentals as comparatively resilient because of tight inventories, constrained refining capacity and more favorable industry structure. Consensus estimates continue to rise, chiefly because of Korea and Taiwan. EM 2026/27 consensus EPS growth forecasts stand at 74%/24%, compared with 60%/23% at end-June. Korea's forecasts rose to 334%/36% from 300%/36%, and Taiwan's to 64%/31% from 43%/27%. Technology accounts for 75.3% of EM's projected 2026 EPS growth contribution and 73.4% of its 2027 contribution. J.P. Morgan also notes that EM earnings growth remains ahead of developed markets even excluding IT: EM 2026/27 EPS growth is cited at 72%/23%, versus 28%/14% for developed markets. The institution nevertheless identifies important near-term constraints. Generationally high bond yields could raise borrowing costs, weaken AI capex and pressure long-duration technology sectors. Other headwinds include tighter monetary policy and liquidity, risk aversion ahead of US mid-term elections, limited earnings catalysts until October's 3Q results and unfavorable seasonal conditions. J.P. Morgan's global strategists believe rising yields and moderate central-bank tightening need not derail the constructive equity backdrop provided inflation expectations remain anchored; unlike 2022, wage growth is easing in many regions and much current inflation pressure is linked to short-term oil-price moves. Against this backdrop, J.P. Morgan stays Overweight EM equities in global allocations and retains a 12-month base-case MXEF target of 2000. It recommends Overweight positions in Korea, China, Taiwan, South Africa, Greece, Poland, Chile, Peru and Malaysia, and is Underweight Colombia and the Philippines. Sector preferences are Overweight IT, Financials, Energy and Materials, and Underweight Consumer Staples and Healthcare. Brazil was moved to Neutral from Overweight in early August because of expected election-related volatility, shallower monetary easing, decelerating growth and worsening credit conditions; Peru was upgraded to Overweight on improving political stability, a robust investment outlook and supportive copper prices.

Analysis framework

J.P. Morgan reviews 2Q26 reported earnings across MSCI EM constituents, comparing revenue, EBITDA, net income, margins, beats versus misses and EPS-revision breadth by country and sector. It then links regional results to sector drivers such as AI investment, supply constraints, domestic demand, commodity conditions and financial-sector trends, and uses consensus EPS forecasts and revisions to frame its market and sector positioning.

Methodology notes

• Industry AnalysisSupply-demand framework

  AI technology supply-demand analysis

  The report assesses foundry, packaging, memory and PCB capacity constraints against AI-related demand and capex to explain earnings durability and pricing power.

• Quantitative, Factor, and Portfolio TheoryStyle factor analysis

  Earnings revisions breadth

  The report tracks the balance of EPS upgrades and downgrades across markets and sectors as an indicator of the breadth and direction of earnings momentum.

• Industry AnalysisVolume-price decomposition

  Revenue, margin and earnings decomposition

  The report separates sales growth, EBITDA growth, net-income growth and margin changes to identify whether earnings performance is driven by volumes, pricing, operating leverage or costs.

Asset mapping & comparison

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

• TSMC

  High-conviction technology exposure to AI foundry demand

  Strengths

  Raised 2026 revenue-growth guidance to more than 40% YoY, lifted capex to US$60-64bn and reported operating margins above 60%.

  Comparison

  Leading-edge utilization and margins remain stronger than mature foundries.

  Risks

  High bond yields could constrain AI capex and pressure long-duration technology valuations.

• Samsung Electronics (005930.KS)

  Covered memory beneficiary of the AI demand cycle

  Strengths

  2Q26 operating profit of W89.4trn beat lowered consensus, supported by memory pricing and won depreciation.

  Weaknesses

  More than W15trn of labor-cost provisions were recorded across 1H26.

  Comparison

  J.P. Morgan groups Samsung with SK hynix as beneficiaries of durable memory tightness.

  Risks

  Memory-cycle durability depends on AI demand, supply discipline and capex conditions.

• SK hynix (000660.KS)

  Covered memory beneficiary of AI and cloud-service-provider demand

  Strengths

  Long-term agreements with ten key customers include mechanisms such as floor prices, take-or-pay and prepayments.

  Comparison

  J.P. Morgan expects the memory industry to retain higher-for-longer earnings durability.

  Risks

  A deterioration in AI capex or rising funding costs could weaken demand and valuation support.

• Alibaba Group Holding Limited (BABA)

  Covered China AI-cloud exposure

  Strengths

  AI Cloud and Compute revenue grew 45% YoY, with approximately 12% margin; AI product revenue was RMB12.4bn.

  Comparison

  The report views the results as a proof point for a cloud re-rating.

• Bank of China (2388.HK)

  J.P. Morgan's top China SOE-bank pick

  Strengths

  Highest overseas profit mix among cited SOE banks at 27% of PBT, with expected overseas NIM and asset-quality improvement.

  Weaknesses

  Retail loans are declining and retail non-performing loans are rising.

  Comparison

  SOE banks grew revenue/profit 9%/6% year on year versus 1%/-9% for joint-stock banks.

  Risks

  Retail credit stress and continued NIM pressure.

Key data

• EM 2Q26 net income growth+80% YoYSupported by 22% revenue growth and 44% EBITDA growth.
• EM Technology earnings growth+347% YoYThe principal source of EM earnings outperformance.
• Korea and Taiwan net income growth+499% YoY / +117% YoYTechnology-led strength drove the regional results.
• EM 2026/27 consensus EPS growth74% / 24%Up from 60% / 23% at the end of June.
• TSMC 2026 capex guidanceUS$60-64bnRaised alongside revenue-growth guidance of more than 40% YoY.
• EM versus DM 2026/27 EPS growth72% / 23% versus 28% / 14%J.P. Morgan's cited comparison of EM and developed-market earnings growth.
• MXEF target2000J.P. Morgan's 12-month base-case target.

Impact & implications

J.P. Morgan argues that sustained AI investment and tight technology supply chains continue to support EM earnings, while the widening contribution from cyclicals and selected regional sectors improves the breadth of the earnings recovery. Its preferred exposure remains IT, Financials, Energy and Materials, although it expects markets to face near-term volatility from yields, liquidity conditions, geopolitics and seasonal factors.

Risks

• Generationally high bond yields could pressure technology valuations, raise borrowing costs and impede capital expenditure.
• Tighter monetary policy and liquidity, risk aversion ahead of US mid-term elections, limited catalysts before 3Q results and unfavorable seasonality could weigh on EM equities in coming weeks.
• Energy-sector strength could fade if the Strait of Hormuz crisis is resolved and oil and chemical balances ease through 2H26-2027.
• China's domestic-demand-sensitive consumer and mass-market property sectors remain weak.
• Brazil faces election-related volatility, shallower monetary easing, decelerating growth and worsening credit conditions.

What to watch

• The durability of AI capex, hyperscaler orders and technology supply constraints across foundry, memory, advanced packaging and PCBs.
• Whether global bond yields rise further and whether inflation expectations remain anchored.
• October 3Q earnings results and the persistence of positive EM earnings-revision breadth.
• Resolution or escalation of the Strait of Hormuz crisis and the resulting oil, refining and petrochemical supply balance.
• Evidence that earnings strength continues to broaden beyond Korean and Taiwanese technology.