MSCI EM fell 2% w/w, but 1QCY26 earnings tracking was significantly better than expected

Overview

This is a Goldman Sachs weekly report on emerging market equity portfolio strategy. It focuses on recent MSCI EM performance, progress through the 1QCY26 earnings season, foreign fund flows, Brazil rate and election sensitivity, and feedback from local investors in Brazil, South Africa, and India. The report shows that market prices were temporarily pressured by Brazilian political news, volatility in Korean tech stocks, and war-related foreign selling, but earnings data have clearly outperformed consensus at the start of the season, providing fundamental support.

Core views

The report's core view is: first, MSCI EM is under near-term pressure, but this is not driven solely by earnings deterioration; rather, it reflects the combined impact of political events, foreign capital withdrawal, and market risk appetite; second, 1QCY26 earnings growth is significantly better than expected, with North Asia technology/industrials, Greek banks, and Brazil energy contributing the bulk of the upgrades; third, Brazilian equities are highly sensitive to domestic rates, and rate cuts together with reasonable valuations may still support certain domestic and rate-sensitive sectors; fourth, before growth re-accelerates, further upside in South Africa may be driven more by commodity exporters and a recovery in gold; fifth, under Iranian war, macro, and earnings risks, Indian investors are leaning more toward selective alpha themes such as energy security, data center equipment, exporters, and small caps.

Analysis framework

The report uses a top-down emerging market portfolio strategy framework, combining weekly index performance, earnings season tracking, valuation, capital flows, macro policy, and local investor surveys. The focus is not on a single company fundamentals story, but on market, sector, and theme allocation, including regional preferences, sector over/underweights, Brazilian rate-sensitive assets, election-cycle performance, and GEM fund flows.

Methodology notes

• Earnings Tracking1QCY26 EPS Tracking

  Compare reported results with season-start consensus expectations to observe EPS growth and the sources of upgrades.

  About 75% of MSCI EM companies have reported results, and EPS growth is tracking at about 41% yoy, above the season-start consensus of about 28%, indicating the earnings season is broadly stronger than expected.

• Valuation AnalysisNTM P/E vs. 10-Year Average Standard Deviations

  Use the position of forward 12-month P/E versus its historical mean to assess valuation pressure or attractiveness.

  MXEF trades at 11.8x NTM P/E, about 0.5 standard deviations below the 10-year average, indicating overall valuation is not in an extreme expensive zone.

• Flow AnalysisEM Foreign Flow and GEM Fund Flow

  Measure market liquidity and risk appetite through exchange-level foreign inflows and outflows, as well as fund subscriptions and redemptions.

  EM equities saw about US$17.5bn of foreign selling in the week, with the largest outflows from Korea and Taiwan, showing substantial short-term funding pressure.

• Macro SensitivityBrazil Rate Sensitivity Framework

  Analyze the negative relationship between Brazilian equity valuations and local interest rates.

  The report notes that Brazilian equities have the strongest negative correlation to local rates within EM; lower rates usually correspond to higher equity valuations, and rate-sensitive as well as domestically exposed sectors may benefit relatively.

Asset mapping & comparison

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

• MSCI EM

  Core coverage index and vehicle for emerging market risk

  Strengths

  Earnings growth tracking has been better than expected, and valuation is about 0.5 standard deviations below the 10-year average.

  Weaknesses

  The index fell 2% on the week and experienced large foreign selling.

  Comparison

  Compared with a single market, MSCI EM is driven jointly by key markets such as Korea, Taiwan, and Brazil.

  Risks

  Continued foreign outflows, war-related risks, political events, and technology stock volatility.

• Brazilian equities

  Key regional market and rate-sensitive asset

  Strengths

  Lower local rates could lift valuations, and oil and gas exporters as well as some domestic bond proxy sectors have allocation value.

  Weaknesses

  The market fell 7% over the week, affected by political news flow, election volatility, and concerns about fund-flow reversals.

  Comparison

  The report says Brazilian equities have the highest negative correlation to local rates within EM.

  Risks

  A rate-cut cycle shorter than expected, election uncertainty, and credit-cycle risks from expensive banks and household leverage.

• Korean equities

  An important North Asia technology and earnings-upgrade contributor

  Strengths

  Strong Korea/Taiwan EPS is helping drive EM earnings growth well above season-start expectations.

  Weaknesses

  The market fell 6% on Friday, with foreign outflows of about US$13.2bn.

  Comparison

  As a tech-heavy market, it is more sensitive to global risk appetite and foreign flows.

  Risks

  De-risking in technology, continued foreign selling, and domestic sector drag.

• South African equities

  A key market in local investor feedback

  Strengths

  Commodity exporters supported by the gold recovery may continue to lead gains.

  Weaknesses

  Domestic sectors may need a sustained improvement in economic growth to truly turn around.

  Comparison

  Compared with domestic cyclical sectors, commodity exporters have stronger support.

  Risks

  Insufficient economic growth, post-war capital-flow reversals, and a pullback in commodity prices.

• Indian equities

  A market highlighted in local investor feedback and alpha themes

  Strengths

  Energy security, data center equipment, exporters, and small caps offer selective opportunities.

  Weaknesses

  Facing pressure from the Iran war, macro conditions, earnings risks, and continued foreign selling.

  Comparison

  The report notes that India was recently downgraded to MW, with a weaker relative preference than Korea, China, Brazil, and South Africa.

  Risks

  Persistent foreign selling, macro data uncertainty, and earnings downgrade risk.

• Commodity exporters and gold-related assets

  A relatively strong theme within South Africa and Brazil allocations

  Strengths

  A gold recovery and commodity price support could drive related stocks to outperform.

  Weaknesses

  Performance is highly dependent on commodity prices and global risk appetite.

  Comparison

  In the South Africa chart, commodity exporters clearly outperformed financials, defensives, and domestic cyclicals.

  Risks

  A pullback in commodity prices, changes in the dollar and real rates, and a global growth slowdown.

Key data

• MSCI EM weekly performance-2% w/wDragged down by Brazil's decline and Friday selling in Korea.
• Brazil market performance-7% w/wMainly affected by political news flow.
• Korea Friday performance-6%The sharp Friday drop erased most of the week's gains, though the market still finished the week up about 1%.
• MXEF valuation11.8x NTM P/EAbout 0.5 standard deviations below the 10-year average.
• EM 2026E EPS revision+1% w/wEarnings expectations were revised up over the past week.
• C1Q26 EPS growth trackingabout 41% yoyAbove the season-start consensus expectation of about 28%.
• Reported results coverageabout 75% of MSCI EM companies, about 80% of market capUsed to assess earnings season progress.
• EM equity foreign outflowsabout US$17.5bn w/wWar-related risk and outflows from tech-heavy markets were the main pressure.
• Korea foreign outflowsabout -US$13.2bnThe tech-heavy market saw significant selling.
• Taiwan foreign outflowsabout -US$2.5bnAlso affected by foreign selling.
• Thailand foreign inflowsabout +US$0.3bnRecorded positive inflows in the sample.

Impact & implications

For investors, the report suggests that emerging markets still need to manage fund-flow and geopolitical shocks in the near term, but earnings upgrades and non-extreme valuations provide a foundation for selective allocation. Regionally, the focus can be on Goldman’s preferred Korea, China, Brazil, and South Africa; sector-wise, the bias remains toward technology hardware, internet, and commodity-related areas; Brazil requires simultaneous evaluation of rate cuts, election volatility, and bank credit-cycle risks; South Africa is more dependent on gold and commodity exporters; and India should focus on structural alpha themes that can withstand macro and foreign-selling pressure.

Risks

• Continued large-scale foreign outflows from EM, especially from tech-heavy markets such as Korea and Taiwan.
• Rising volatility driven by Brazilian political news flow and the election cycle.
• War-related macro risks affecting India, South Africa, and overall EM risk appetite.
• A rate-cut cycle in Brazil that is shorter than expected, weakening valuation recovery in rate-sensitive stocks.
• Banking sector pressure from high valuations, household leverage, and the credit cycle.
• Chinese and Korean domestic sectors may continue to weigh on C1Q26 EPS growth.
• A decline in commodity and gold prices could weaken South African and commodity-exporter performance.

What to watch

• Whether foreign outflows from MSCI EM slow, especially in Korea and Taiwan.
• Whether subsequent C1Q26 earnings releases can sustain the roughly 41% yoy growth track.
• Whether earnings upgrades in North Asia technology/industrials, Greek banks, and Brazil energy continue.
• Brazil's local rate path, election news flow, and the relative performance of rate-sensitive sectors.
• Whether South Africa's economic growth shows sustained improvement, or whether the market continues to be led by commodity exporters.
• Indian foreign selling, macro data, and the performance of alpha themes such as energy security and data center equipment.
• Whether GEM fund flows continue at a strong buying pace.