Emerging market momentum unwind continues, but 2Q profits are expected to post strong growth led by technology

Overview

This report is Goldman Sachs' EM Weekly Kickstart and focuses on emerging market equities performance in the context of renewed Middle East escalation, momentum unwind, and AI/technology rotation. It also previews the emerging into 2Q26 earnings season that is about to begin. The report covers regional and sector allocation, flows, valuation, earnings revisions, style performance, Brazil rate sensitivity and election history, CEEMEA allocation opportunities, and macro forecasts.

Core views

The core view is that in the short term, emerging markets are pressured by momentum unwind and a cooling in crowded AI/technology positioning, especially in North Asia where Korea and Taiwan are most affected. But earnings fundamentals remain supportive, with consensus 2Q26 EPS expected to grow roughly 68% year-over-year and technology and industrials expected to contribute the most. Goldman Sachs says the partial unwind in AI/technology does not change its view that memory fundamentals and profit growth remain strong, but EM market performance may spread from the previously narrow AI/technology-led theme to broader regions and sectors. In positioning, the report emphasizes diversification, maintaining high-conviction exposure to Taiwan, Korea, and other technology-heavy markets, while favoring idiosyncratic markets such as Brazil, South Africa, Hungary, and Greece, and highlighting medium-term upside in Saudi Arabia domestic stocks.

Analysis framework

The report uses a top-down emerging markets strategy framework combining index performance, regional/sector contributions, EPS expectations, valuation percentiles, flows, factor momentum, macro policy, and historical event samples. For the earnings season, it decomposes coverage ratios and consensus EPS growth by region and sector; for momentum unwind, it tracks factor and crowded-position performance for AI infrastructure and popular long funds, as well as North Asia momentum; for Brazil, it examines rate changes, election cycles, and historical return decomposition; for CEEMEA it compares relative valuation, rate convergence, and banking/financial stock performance by region.

Methodology notes

• equity_strategy2Q EPS Preview

  Earnings preview

  Using 2Q26 disclosure pace, market-cap coverage ratios, and regional/sector year-on-year EPS contribution to assess the sources and risks of earnings-season growth in emerging markets.

• factor_analysisMomentum Unwind

  Momentum unwind

  Tracking EM Momentum factors, AI infrastructure, crowded long positions in popular funds, North Asia momentum, and sector performance to judge the impact of crowding unwind on breadth and style rotation.

• Valuation methodsForward P/E and Z-score

  Valuation percentile and standard deviation

  Using forward P/E, P/B, dividend yield, and 10-year Z-score to compare overall, regional, and sector valuations in emerging markets, measuring current valuation attractiveness versus history and developed markets.

• macro_strategyRates Sensitivity and Election Playbook

  Rate sensitivity and election cycle

  Using Brazil as an example, compares five-year rate down cycles, rate-sensitive stocks, domestic cyclicals, FX, and historical pre/post-election performance to assess how macro variables affect equity returns.

Asset mapping & comparison

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

• MSCI EM / MXEF

  Core research focus

  Strengths

  Valuation is 10.7x forward P/E, below the 10-year average by about 1.4 standard deviations; 2026E EPS was revised up for the week; 2Q EPS outlook is strong.

  Weaknesses

  Down 2% for the week, market breadth remains narrow, and performance was hurt recently by Middle East escalation and momentum unwind.

  Comparison

  Still trades at a significant discount relative to the U.S. and major developed markets.

  Risks

  Foreign outflows, crowding unwind in AI/technology, geopolitical shocks, and earnings not meeting expectations.

• Korea

  High-beta tech- and AI-related market

  Strengths

  North Asia is one of the main sources of 2Q EM earnings growth; the report still views memory and fundamentals in technology as relatively strong.

  Weaknesses

  Down 8% for the week; Korea momentum down about 22% since June 22.

  Comparison

  Clearly underperformed China and Brazil for the week.

  Risks

  Continued momentum unwind, crowded technology positioning, foreign outflows, and downside EPS revisions.

• Taiwan

  Goldman Sachs' preferred tech-heavy market

  Strengths

  Benefits from the technology hardware, AI, and memory earnings chain, and remains within Goldman Sachs' preferred markets.

  Weaknesses

  Down 3% for the week, net outflows of about US$5.9bn, and Taiwan momentum down about 8%.

  Comparison

  Also part of the tech-heavy North Asia group like Korea, but with a smaller weekly decline.

  Risks

  AI/semiconductor valuation and positioning pressure, capital outflows, and declining global technology risk appetite.

• China

  Relatively strong emerging market that week

  Strengths

  Up 3% for the week, providing relative resilience against the broader MSCI EM drawdown.

  Weaknesses

  The report does not provide detailed positive arguments on China-specific earnings or policy drivers.

  Comparison

  Outperformed Korea, Taiwan, and MSCI EM overall that week.

  Risks

  Earnings durability, changes in policy expectations, and regional capital rebalancing.

• Brazil

  Idiosyncratic-favored market and rate-sensitive trade

  Strengths

  Up 2% for the week; historically, Brazilian equities and rate-sensitive sectors performed well during rate-cut phases; Goldman Sachs favors Brazil.

  Weaknesses

  External flow swings and election cycles can increase volatility.

  Comparison

  Rate-sensitive and domestically exposed stocks have outperformed the benchmark by about 2-3x on average in historical easing phases.

  Risks

  Domestic rate path disappointments, BRL volatility, election uncertainty, and a potential reversal in foreign flows.

• Saudi Arabia domestic equities

  Medium-term upside theme

  Strengths

  The report sees medium-term upside in domestic equities as Saudi strategic spending plans are implemented over the coming years.

  Weaknesses

  Near-term catalysts and valuation detail are limited in the input.

  Comparison

  Unlike North Asia, which is more exposed to global technology cycles, Saudi domestic equities are more dependent on domestic spending and policy channels.

  Risks

  Fiscal spending pace, oil prices, regional geopolitics, and implementation risk.

Key data

• MSCI EM weekly performance-2% w/wThe decline was driven by North Asia, which has a higher AI/technology weight, with Korea down 8% and Taiwan down 3%.
• China weekly performance+3%Rose while MSCI EM was down overall.
• Brazil weekly performance+2%One of the major markets with the strongest performance that week, alongside China.
• EM 2026E EPS revision+0.4% w/wThe report states EM 2026E EPS was revised up for the week.
• MXEF forward valuation10.7x fwd P/EAbout 1.4 standard deviations below the 10-year average.
• EM equity foreign flows-US$6.6bn w/wOutflows mainly driven by Taiwan -US$5.9bn and Korea -US$2.3bn.
• 2Q26 EM EPS consensus growthabout +68% yoyMainly driven by strong North Asia earnings.
• EM EPS growth excluding North Asiaabout +8% yoyThe report says LatAm is relatively strong, while South Asia is relatively weak.
• EM Momentum factor unwindabout -15% since 2026-06-22Third consecutive week of unwind, with Korea momentum about -22% and Taiwan momentum about -8%.
• Historical median return in Brazil easing cycleBovespa about +15%, rate-sensitive stocks about +39%Report table data show that during a five-year rate-cut phase, rate-sensitive and domestic-exposure stocks averaged 2-3x performance above the benchmark.

Impact & implications

For portfolios, the report suggests short-term management of drawdown risk from AI/technology and momentum exposures, but cautions against interpreting the unwind as the end of the earnings cycle. If 2Q earnings come through, EPS revisions continue to improve, and flow pressure eases, emerging markets could shift from being driven by a handful of technology leaders to participation across broader sectors and regions. Valuation discounts, potential rate cuts, and country-specific opportunities support a constructive medium-term positioning, while Middle East risk, outflows, and crowding unwind remain near-term sources of volatility.

Risks

• Renewed Middle East escalation could continue to suppress emerging-market risk appetite.
• Momentum factors and crowded AI/technology positions continue to unwind, potentially putting further pressure on North Asia and technology hardware.
• Foreign outflows intensify, especially in tech-heavy markets such as Taiwan and Korea.
• If 2Q earnings come in below the consensus around 68% year-over-year growth, EPS revisions could turn lower.
• Market breadth remains narrow, and if dispersion does not materialize, index performance remains dependent on a few industries and markets.
• Brazil's interest-rate path, FX moves, and election cycle could create high volatility.

What to watch

• Earnings realization after more than 75% of market cap has reported 2Q results in July.
• Whether EM 2026E EPS revisions continue to trend higher.
• Whether EM Momentum factor, AI infrastructure basket, and crowded mutual-fund longs stabilize.
• Whether foreign flows for Taiwan and Korea turn from outflows to a more stable state.
• MSCI EM market breadth, the share of stocks trading above the 200-day moving average, and EEM implied volatility.
• Brazil's five-year rate, first-rate-cut expectation, BRL/USD, and the performance of domestic cyclicals and rate-sensitive sectors.
• Progress of Saudi Arabia strategic spending plan implementation and domestic-equity earnings improvement.