What’s Happening in EM: Trump Weighs on EM Earnings (Podcast)

While Donald Trump's presidency initially spurred a sustained rally in emerging market stocks, his policies are now reportedly beginning to crimp corporate earnings in the developing world, signaling a shift in their impact on EM profitability.

Analysis

A significant shift appears to be underway in the emerging markets (EM) investment landscape. While the Trump administration initially correlated with the most sustained rally in EM stocks under any US president, new analysis suggests his policies are now becoming a headwind. Specifically, corporate earnings within the developing world are reportedly beginning to experience a negative impact. This creates a critical divergence for investors: the past momentum of EM equities may no longer be supported by underlying fundamentals, as profitability is now being directly crimped by US policy actions. The cautious sentiment reflects this inflection point, where the positive market performance of the past is being challenged by a deteriorating earnings outlook.

Key Decisions for Investors

• Investors should increase scrutiny on company-specific earnings and forward guidance in emerging markets, as broad index performance may be masking underlying fundamental weakness.
• It is now critical to assess portfolio exposure to specific EM countries and sectors based on their sensitivity to US trade policies, which are identified as a primary source of earnings pressure.
• Consider rotating capital towards EM companies with stronger domestic demand drivers or those insulated from international trade disputes to mitigate rising geopolitical risk.
• Monitor for a growing divergence between EM equity valuations and corporate earnings revisions, as a widening gap could signal an impending market correction.