Goldman Sachs: Emerging market equities may broaden gains beyond AI/tech, with earnings still the core driver

Overview

This is a Goldman Sachs outlook report on emerging market equities for the second half of 2026. It argues that while EM equities performed strongly in the first half, the advance was narrow, with gains driven mainly by AI/technology-related North Asian markets and the technology hardware sector. In the second half, against a backdrop of continued earnings upgrades, easing oil-price pressure, and lower growth risks, gains may broaden to oil-importing countries, rate-sensitive markets, and non-tech cyclical sectors.

Core views

The core view is to maintain a constructive stance on EM equities. Earnings rather than valuation expansion remain the main source of index returns; South Korea and Taiwan remain leaders, supported by the memory cycle and AI demand, though volatility may rise; lagging South Asian markets such as India may recover part of their losses as oil prices fall and FX pressure eases; rate-sensitive markets such as South Africa and Brazil have rebound potential after valuation and macro adjustments; Greece and Hungary remain idiosyncratic opportunities within emerging Europe.

Analysis framework

The report combines top-down macro scenarios, oil-price and growth-risk assumptions, earnings forecasts, valuation levels, market and sector allocation tables, and regional event risks. Index targets are driven mainly by earnings growth and a broadly unchanged target P/E multiple; sector adjustments reflect a more constructive non-tech cyclical baseline following the easing in oil prices.

Methodology notes

• Earnings and valuationEPS revision/P-E framework

  Use forward EPS revisions, earnings growth forecasts, and target P/E to explain index returns.

  The report notes that consensus forward EPS has been upgraded by 40% year to date, while MSCI EM P/E has fallen from 13.5x to around 11x, so index gains have come mainly from earnings rather than valuation expansion.

• Macro scenarioOil price and growth risk scenario

  Incorporate the US-Iran agreement, Brent oil forecasts, and US recession probability into the EM equity outlook.

  Goldman Sachs' commodities team lowered its Brent forecast to $80/bbl by end-2026 and an average of $75/bbl in 2027, while economists cut the 12-month US recession risk from 25% to 15%, supporting catch-up gains in oil-importing countries and cyclical sectors.

• Allocation frameworkMarket and sector OW/MW/UW matrix

  Express relative preferences across markets and sectors through overweight, market weight, and underweight ratings.

  The report keeps market allocations unchanged, continuing to favor North Asia tech markets, rate-sensitive markets such as Brazil and South Africa, and idiosyncratic opportunities such as Greece and Hungary; it upgrades Banks and Capital Goods to OW, and Chemicals to MW.

• Thematic frameworkHALO

  heavy asset/low obsolescence, meaning heavy-asset, low-obsolescence-risk assets.

  The report believes medium-term structural themes such as energy security, AI infrastructure, and capital-intensive/HALO stocks may continue to perform well, especially supply-chain areas including infrastructure, long-cycle industrial assets, defense, and shipbuilding.

• Risk managementOptions hedging

  Use put-spread collars or long volatility positions to mitigate sharp downside risk.

  Under a constructive pro-cyclical view, the report recommends continuing to hedge against rapid drawdowns caused by a hawkish Fed, crowded AI trades, or leveraged positioning through options strategies.

Asset mapping & comparison

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

• MSCI EM

  Core index and overall allocation target

  Strengths

  Strong earnings upgrades, high earnings growth forecasts for 2026 and 2027, and valuations near the 10-year average while still trading at a discount to most developed markets.

  Weaknesses

  First-half gains were concentrated, with insufficient market breadth; the equal-weighted index and non-tech sectors lagged notably.

  Comparison

  Outperformed SPX and MSCI DM ex-US in 1H 2026; target returns are driven mainly by earnings rather than valuation expansion.

  Risks

  Further Fed hawkishness, higher USD and rates, sharp declines in AI, or renewed geopolitical conflict could weigh on returns.

• South Korea and Taiwan

  North Asia AI/technology earnings theme; overweight maintained

  Strengths

  Supported by the memory supercycle and AI demand, with technology hardware and semiconductors leading performance year to date.

  Weaknesses

  Retail leveraged flows and dealer rebalancing flows may amplify micro-level volatility.

  Comparison

  Still leading versus most EM markets and were the main contributors to MSCI EM gains in the first half.

  Risks

  Questions over the sustainability of AI capex, unwinding of crowded trades, or leveraged ETF volatility could trigger rapid pullbacks.

• India, Turkey, Egypt

  Catch-up opportunities among oil-importing countries

  Strengths

  Easing oil-price pressure improves growth and earnings prospects, and some markets remain below pre-war levels, leaving room for recovery.

  Weaknesses

  Some markets are still constrained by FX pressures, foreign inflows, and domestic policy uncertainty.

  Comparison

  Compared with AI/technology markets that have already risen substantially, these oil importers are laggards that could benefit from subsequent broadening.

  Risks

  A renewed rise in oil prices, stronger USD, or renewed local-currency pressure could weaken the catch-up thesis.

• South Africa

  Rate-sensitive and gold-linked market; the report remains constructive over the medium term

  Strengths

  Valuations are near multi-year lows, growth and earnings may recover, and medium-term gold prices are supported by central bank diversification demand.

  Weaknesses

  Recently hit hard by falling gold prices and rising local rates, with market volatility still high.

  Comparison

  The report believes South African equities have overshot relative to key cyclical macro variables.

  Risks

  Fed hawkishness, weaker gold, further rises in local rates, or a weaker-than-expected growth recovery.

• Brazil

  Preferred LatAm market; overweight maintained

  Strengths

  Valuation at around 8x forward P/E, with potential for a rebound in domestic cyclicals and rate-sensitive assets if easing expectations recover.

  Weaknesses

  Has given back most earlier gains since April, with rising concerns over political uncertainty and a shorter easing cycle.

  Comparison

  Relative to past easing cycles, Brazilian equities are trading at a weaker level currently.

  Risks

  The October presidential election, continued hawkish repricing in rates markets, or flow reversals due to lower energy prices.

• Greece and Hungary

  Idiosyncratic opportunities in emerging Europe

  Strengths

  Greece has a constructive macro backdrop with strong bank growth, capital, and profitability; Hungary benefits from EU fund unlocking, dovish policy, and potential eurozone convergence re-rating.

  Weaknesses

  These are relatively small markets and are vulnerable to changes in liquidity and policy expectations.

  Comparison

  Compared with general EM beta, both are driven more by local reforms, funding, and convergence themes.

  Risks

  Changes in EU fund progress, policy paths, eurozone rate conditions, and local political factors.

• Banks

  Sector upgraded to OW

  Strengths

  Strong earnings growth prospects in sub-regions such as India, emerging Europe, and MENA, with undemanding valuations.

  Weaknesses

  Sensitive to local rate paths, credit cycles, and regulatory conditions.

  Comparison

  Relative to some high-valuation growth sectors, banks offer earnings visibility and valuation support.

  Risks

  Easing paths that disappoint, deteriorating asset quality, or slower macro growth.

• Capital Goods

  Sector upgraded to OW, supported by HALO and capital-intensive themes

  Strengths

  Supply-chain areas such as infrastructure, long-cycle industrial assets, defense, and shipbuilding fit the preference for heavy-asset, low-obsolescence-risk exposures.

  Weaknesses

  Has already performed strongly year to date, and some stocks may already reflect optimistic expectations.

  Comparison

  Compared with asset-light or high-obsolescence-risk sectors, it is more supported by the market's preference for heavy-asset and capital-intensity themes.

  Risks

  A slowdown in global capex, reversal in order cycles, or valuation digestion pressure.

• Energy

  Downgraded to MW

  Strengths

  Previously supported by higher oil prices and earnings upgrades in the energy sector.

  Weaknesses

  With the Brent forecast lowered, the sector's EPS upgrade momentum may be peaking.

  Comparison

  Relative to downstream chemicals and oil-importing countries, the energy sector is less attractive under a falling oil-price scenario.

  Risks

  Could outperform in the short term if oil prices rise again; if oil prices continue to fall, earnings pressure would increase.

• Internet/Media & Entertainment

  Downgraded to MW

  Strengths

  Some Chinese consumer internet companies may still have room for valuation recovery.

  Weaknesses

  The sector is mainly dominated by Chinese consumer internet, while the report relatively prefers a broadening into non-tech cyclicals rather than adding further exposure here.

  Comparison

  Relative to banks, capital goods, and chemicals, current allocation attractiveness has declined.

  Risks

  Weaker-than-expected recovery in Chinese consumption, regulatory and competitive pressures, or spillover from volatility in AI/tech sentiment.

• Chemicals and Other Materials

  Upgraded to MW

  Strengths

  Lower oil prices and easing energy supply bottlenecks directly benefit downstream chemicals, and earnings sentiment has recently improved.

  Weaknesses

  Demand remains tied to global manufacturing and domestic cycles.

  Comparison

  Relative to upstream energy, chemicals benefit more directly under a falling oil-price scenario.

  Risks

  A rebound in oil prices, insufficient demand recovery, or overcapacity pressure.

Key data

• MSCI EM first-half performance+23%Significantly outperformed SPX at +8% and MSCI DM ex-US at +7%, though gains were concentrated in AI/technology-related areas.
• Equal-weighted emerging market index+4% YTDShows limited breadth in the first-half rebound, with non-leading tech markets and sectors lagging.
• Consensus forward EPS upgrades+40% YTDEarnings upgrades exceeded the MSCI EM price gain and were the main driver of index returns.
• MSCI EM valuation changeFrom 13.5x down to around 11x P/EThe P/E compression shows that index gains were not mainly driven by valuation expansion.
• MSCI EM earnings forecast+55% in 2026; +20% in 2027Goldman Sachs expects EM earnings growth to significantly exceed that of developed-market peers.
• Earnings forecast excluding South Korea and TaiwanDouble-digit growth in both 2026 and 2027, around 11%Even excluding North Asian AI beneficiaries, the earnings outlook remains resilient.
• MSCI EM target1900 by year-end; 2000 in 12 monthsImplies a 12-month USD price return of 17% and total return of 19%.
• Brent oil price forecast$80/bbl by end-2026; $75/bbl average in 2027The lower oil-price forecast supports oil-importing countries and downstream chemicals.
• 12-month US recession riskDown from 25% to 15%Lower tail risk of growth downside helps cyclical broadening in emerging markets.
• South Africa market drawdown and valuationAbout 20% below pre-war levels; around 8x P/EThe report argues that South African equities have overreacted to gold, rates, and growth variables.
• Brazil market valuationAround 8x forward P/EBrazil looks cheap relative to past easing cycles, though the October election may bring volatility.
• Sector changesBanks and Capital Goods upgraded to OW; Chemicals upgraded to MW; Energy and Internet/Media & Entertainment downgraded to MWThe changes reflect a more constructive non-tech cyclical baseline after oil prices eased.

Impact & implications

The investment implication is that opportunities in EM equities may broaden from a handful of AI/technology leaders to a wider set of cyclical and domestic-demand assets. Portfolios can continue holding the North Asia AI earnings theme while increasing focus on beneficiaries of lower oil prices, rate-sensitive markets, banks, capital goods, and chemicals; however, Fed hawkishness, a stronger dollar, and drawdown risk from crowded AI trades should be managed with options or volatility strategies.

Risks

• Persistent Fed hawkishness could drive further repricing of rate hikes and push rates and the dollar higher.
• The AI sector could correct sharply due to concerns over capex sustainability, crowded positioning, or retail leverage.
• Oil prices and Middle East geopolitics could flare up again, weakening the catch-up case for oil importers, chemicals, and cyclical sectors.
• Rising political uncertainty ahead of Brazil's October election could intensify volatility in local assets.
• South Africa's market may still be hit by changes in gold prices, local rates, and growth expectations.
• Weak growth in Mexico, US trade policy and USMCA review, as well as fiscal and policy execution risks in Colombia, may drag on parts of LatAm markets.

What to watch

• Whether EM earnings momentum and the breadth of earnings revisions continue to improve during the 2Q earnings season.
• Whether Brent stays near Goldman Sachs' revised path, and the earnings response of oil-importing countries and downstream chemicals.
• Whether the Fed path, US real rates, and the dollar tighten global financial conditions again.
• Volatility in South Korea and Taiwan tied to AI investment returns, the memory cycle, leveraged ETFs, and retail flows.
• Ongoing effects of India's FX pressure and RBI measures to attract foreign capital.
• Brazil's October election, easing expectations, and performance of domestic cyclical stocks.
• Whether South Africa's gold prices, local rates, and growth data support valuation recovery.
• Progress in Greek bank earnings, Hungary's EU fund unlocking, and eurozone convergence re-rating.