AI demand drives surge in emerging market earnings expectations, valuation discount to US stocks hits 20-year high.

Notably, earnings expectations for emerging market stocks have continued to surge, leaving their valuations at historically low levels relative to their US counterparts and potentially offering long-term investors a buying opportunity. The MSCI Emerging Markets Index currently trades at a forward price-to-earnings ratio of just under 9x, based on expected earnings over the next 12 months, while the corresponding valuation for S&P 500 constituents is about 19x. The valuation discount of emerging market stocks relative to US stocks has reached 53%, the widest level since Bloomberg began compiling the data in 2006. So far this year, the emerging markets index is still up 15%, outperforming the S&P 500 by about 3 percentage points. Earnings forecasts have been raised far faster than share prices during the year, thereby compressing valuation levels. Artificial intelligence companies have accounted for most of the upward earnings revisions in emerging markets. While US hyperscalers are investing heavily in AI development, technology companies in developing economies are to a large extent the recipients of that spending, supplying chips, components and hardware for AI infrastructure. Emerging market stocks are getting cheaper This has prompted analysts to raise earnings expectations for emerging market tech stocks, even as concerns about AI valuations are more broadly driving investors away from the sector. Mark Matthews, head of Asia research at Switzerland-based Baosheng Media Group Holdings Ltd bank in Singapore, said: "The prices of what Asian tech companies produce, namely semiconductors and related hardware, have not come down." "US tech companies have generally been raising their earnings guidance to analysts. They are the largest customers of Asian semiconductor and related hardware companies." Profit outlook is bright The composite forward 12-month earnings estimate for average profits of MSCI Emerging Markets Index constituents has soared 70% this year alone, repeatedly hitting record highs. Asia led with an 87% upward revision to earnings per share expectations, Latin America contributed 28%, while emerging Europe, the Middle East and Africa a region at the center of multiple conflicts and debt troubles lagged with an 8.6% increase. Asian markets lead The emerging markets information technology sub-index has risen 63% this year, compared with a 23% gain in the S&P 500 information technology index. Profit expectations for that emerging markets index have also been raised by 128%. Even as fund flows and market dominance shift away from AI stocks, technology companies continue to show strong earnings momentum. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) gave a better-than-expected earnings outlook, encouraging analysts to further raise forecasts. But since the update, the stock price has fallen as investors flee the overcrowded AI sector. Robert Naess, a portfolio manager at Nordea Investment Management, said: "Clearly, concerns about the sustainability of AI investment are growing." "However, what particularly interests me is that earnings expectations remain extremely strong while share prices have collapsed."