Emerging Markets’ Trump Rally at Risk as Tariff Reality Kicks In

The MSCI Emerging Markets Index has experienced an eight-month rally from January through August, coinciding with the start of Donald Trump's second term, a performance only seen twice before in 37 years (2017 and 1993). However, this 'Trump rally' is now at risk as the very trade and fiscal policies driving the initial sentiment are simultaneously beginning to depress emerging market corporate earnings, posing a fundamental challenge to the sustained market advance.

Analysis

The MSCI Emerging Markets Index has recorded a significant eight-month rally from January through August, a rare event documented only twice before in the past 37 years (in 2017 and 1993). This performance coincides with the beginning of Donald Trump's second presidential term, echoing a similar initial boon for the asset class in 2017. However, the sustainability of this rally is now in question. The same trade and fiscal policies that may have initially fueled positive sentiment are now reportedly causing a deterioration in corporate earnings across emerging markets. This creates a potential divergence between recent market performance and underlying fundamentals, signaling that the 'Trump rally' is at risk as the reality of tariffs begins to weigh on corporate profitability.

Key Decisions for Investors

• Investors should treat the recent eight-month rally in emerging markets with caution, as the fundamental support from corporate earnings appears to be weakening due to trade and fiscal policy impacts.
• It is prudent to re-evaluate exposure to emerging market ETFs like EEM, shifting focus from price momentum to the resilience of corporate earnings in the face of potential tariff-related pressures.
• Monitor upcoming emerging market corporate earnings reports and any new announcements regarding U.S. trade policy, as these will be the key catalysts determining the asset class's direction moving forward.