Why Emerging Markets Are Outperforming the S&P 500 in 2026

Because these companies are large components of emerging‑market benchmarks, their performance has significantly boosted the broader MSCI Emerging Markets Index.

Taiwan and South Korea are gaining weight in global portfolios

The dominance of chipmakers has reshaped the composition of emerging‑market benchmarks.

Taiwan now represents the largest country weight in the MSCI Emerging Markets Index, overtaking China as investment flows increasingly target economies with strong semiconductor industries.

Taiwan alone accounts for roughly 24.8% of the index, reflecting the outsized influence of TSMC and other technology exporters.

South Korea’s influence has also been climbing as Samsung Electronics and SK Hynix benefit from the global expansion of AI infrastructure. Markets heavily exposed to semiconductor manufacturing have therefore become the main engines of emerging‑market equity performance.

A weaker U.S. dollar is helping emerging markets

Currency dynamics are another important catalyst.

A weaker U.S. dollar historically supports emerging‑market assets, because it improves dollar‑denominated returns for international investors and eases financial conditions for economies with dollar‑linked debt or trade exposure.

As the dollar softens and investors search for diversification away from expensive U.S. equities, capital flows have increasingly moved into emerging‑market funds and ETFs. That shift has amplified the gains already driven by the semiconductor sector.

Relative valuations are also attracting investors

Emerging‑market equities entered 2026 after years of lagging developed markets. Many asset managers argue that valuations remain comparatively attractive, especially relative to the high multiples of large U.S. technology stocks.

Combined with improving earnings momentum in technology‑heavy Asian economies, this valuation gap has encouraged a rotation of global portfolios toward emerging markets.

Risks that could derail the rally

Despite the strong momentum, several risks remain.

1. Heavy concentration in a few companies
The emerging‑market rally is highly dependent on a small group of semiconductor giants. If demand for AI chips slows or earnings disappoint, the broader index could quickly lose momentum.

2. Dependence on the global chip cycle
Taiwan and South Korea rely heavily on semiconductor exports. A slowdown in data‑center investment or AI spending would directly affect their economies and stock markets.

3. Trade policy and tariffs
Semiconductor supply chains are highly globalized and politically sensitive. Export restrictions, tariffs, or technology controls could disrupt the industry.

4. Geopolitical tensions around Taiwan
Investors have largely looked past geopolitical concerns during the AI rally, but tensions in the Taiwan Strait remain one of the most significant risks to global semiconductor supply chains.

The bigger picture

For more than a decade, U.S. equities dominated global markets. The 2026 rally suggests a partial reversal of that trend, as AI‑driven semiconductor demand shifts market leadership toward emerging Asia.

Whether this outperformance continues will depend on several factors: the durability of the AI infrastructure boom, the direction of the U.S. dollar, and the stability of global supply chains that power the semiconductor industry.

For now, the combination of technology leadership, favorable macro conditions, and global capital rotation has placed emerging markets—particularly Taiwan and South Korea—at the center of the equity story in 2026.