How emerging-market stocks can keep trouncing the S&P 500

Core Viewpoint - Emerging markets (EM) equities are experiencing significant outperformance, potentially entering a multiyear trend of superior returns, driven by factors such as U.S. dollar weakness and geopolitical shifts [1][6]. Performance Metrics - The iShares MSCI Emerging Markets ETF has outperformed the S&P 500 by 11.1 percentage points as of December 16, 2025, marking its widest annual outperformance since 2017 [2][5]. - The ETF has gained 26.7% year-to-date, surpassing the S&P 500's 15.6% increase [3]. Market Dynamics - The decline of the U.S. dollar has positively impacted emerging markets, alongside exposure to the artificial intelligence boom [4][17]. - The MSCI Emerging Markets Index is currently trading at a price-to-earnings ratio of approximately 13, which is significantly lower than the S&P 500's ratio of around 22 to 23, indicating potential for continued growth [12]. Regional Insights - South Korean stocks have been a major contributor to the gains in emerging markets, with companies like Samsung Electronics and SK Hynix benefiting from the AI trend [9][11]. - Notably, India, traditionally a strong performer, has lagged behind South Korea this year [7]. Investment Strategies - The Freedom 100 Emerging Markets ETF, which focuses on countries with higher personal and economic freedom, has seen a 50% increase in 2025, highlighting the importance of governance and trade policies in investment performance [10][16]. - Investors are increasingly seeking diversification beyond U.S. stocks, which may sustain the momentum of emerging markets into 2026 [4][6]. Currency Impact - The U.S. dollar's decline, which has fallen over 9% this year, has provided a tailwind for U.S. investors in emerging markets, enhancing returns through currency conversion [18][19].