MW Why Wells Fargo expects the emerging-markets outperformance to reverse

By Jules Rimmer

This year, emerging-market equities have outperformed the S&P 500 by a wide margin and investors have debated whether the relative strength can be sustained. A new report by Wells Fargo analyst Austin Pickle expects the trend to reverse.

The case for emerging markets has become fashionable of late - including this week's upgrade of the asset class from JPMorgan - so a contrarian argument against is more noteworthy at present.

The 10% relative outperformance racked up by EM EEM since January owed much to institutional underweights in the asset class, rock-bottom sentiment and favorable valuations. Entering 2025, meanwhile, the S&P 500 SPX had enjoyed two stellar years of almost 25% returns. This year's volatility, though, combined with signs of China bottoming and a weaker dollar, swung the pendulum back the other way.

The reversal of fortunes was a long time coming. As 2024 ended, emerging indices were marking 18 years, predating the global financial crisis, during which its benchmark index, the MSCI EM, had declined 15% while its earnings had scarcely grown. Contrast this with the S&P 500.

Pickle blamed the doldrum years on political and economic instability, poor corporate governance, unreliable regulatory regimes and, latterly, the Chinese headwinds of a real-estate bubble, excessive debt and growth deceleration.

The chief consideration for the continuance of 2025's trend is the relationship between emerging markets and the dollar. Historically, EM perform best during periods of dollar infirmity.

As advocates of a global economic rebound in the second half of the year as trade concerns diminish, Wells Fargo believes emerging-market stocks may continue to rise but will lag their U.S. peers. The tariff row is likely to last longer with China and since it has a 30% weighting in the MSCI emerging-markets index, this will impair performance of the index as a whole.

Longer term, Wells Fargo favors the more predictable and stable political and regulatory approach of developed markets and its recommendation is to trim equity exposure to the asset class and reposition more positively toward the U.S. and developed markets more broadly..

-Jules Rimmer

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May 20, 2025 10:10 ET (14:10 GMT)

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