As Tariffs Kick in, Emerging Markets' Trump Rally is at Risk

Donald Trump’s return to the White House has sparked a powerful rally in emerging-market equities, mirroring the trend seen during his first presidency. Yet, beneath the surface, cracks are beginning to show as his trade and fiscal strategies weigh heavily on corporate profits.

‍

The MSCI Emerging Markets Index has delivered positive returns every month from January through August, marking the start of Trump’s second term on a strong note. This winning streak is rare occurring only twice before in the index’s 37-year history: in 2017, during Trump’s first year, and in 1993 under Bill Clinton.

‍

But investors should tread carefully. While emerging-market stocks have added an impressive $4.3 trillion in market value this year, company earnings tell a different story. Many firms in developing nations have missed 2025 profit forecasts and are now on track to underperform estimates for the 13th consecutive quarter. Analysts have also begun cutting forward-looking earnings expectations, signaling more pain ahead.

‍

The divergence between surging stock prices and weak corporate fundamentals can be traced back to Trump’s economic playbook. His aggressive tariff measures and fiscal expansion have reduced the appeal of the U.S. dollar as a safe haven, pushing global investors to seek alternatives. This shift has fueled demand for emerging-market assets.

‍

However, Trump’s trade restrictions and technology curbs have eroded growth prospects for developing economies from South Korea to Brazil. Export-driven companies are facing tighter margins and slowing revenue growth.

‍

“We remain cautious on EM equities within the global landscape, as tariff-related headwinds continue to dampen sentiment,” noted Nenad Dinic, equity strategist at Bank Julius Baer. “Earnings-per-share projections for 2025 turned negative again after the 90-day tariff pause, reflecting mounting concerns over trade frictions in the latter half of the year.”

‍

At the start of the year, most emerging-market fund managers were bracing for a strong dollar, anticipating that Trump’s tariff policies would delay U.S. monetary easing and boost demand for the greenback. That outlook implied tough times ahead for developing-nation stocks, which typically lag when the dollar rallies.

‍

Instead, the opposite happened. Trump’s policies inadvertently triggered capital outflows from U.S. markets, weakening the dollar and sparking a surge in EM assets. Investors piled into themes such as AI-driven tech in Asia, resource plays in Africa, and turnaround opportunities in frontier markets.

‍

“The dominant tailwind for emerging markets under Trump has been the weaker dollar,” explained Hasnain Malik, strategist at Tellimer in Dubai. “Ironically, fears over the erosion of checks and balances in the U.S. pushed capital into EM the very asset class often associated with such risks.”

‍

Despite the strong price action, underlying earnings trends paint a worrisome picture. Nearly half of the companies in the MSCI EM Index have missed profit expectations this year, with the average shortfall hovering around 8%. Export-oriented sectors like commodities and industrials are feeling the brunt.

‍

Several firms have explicitly cited Trump’s trade measures as a drag on performance. Samsung Electronics’ chip division shocked the market with quarterly operating profit that fell 85% below forecasts, largely due to higher inventory costs for unsold AI chips caused by U.S. export controls.

‍

India, once a favorite among fund managers, has now become one of the least preferred markets after Trump slapped a 50% tariff on its exports, according to Nomura Holdings. A Bank of America survey revealed that in just three months, India went from the top Asian pick to the biggest underweight position.

‍

Tata Motors, the parent company of Jaguar Land Rover, reported a staggering 63% drop in net income in August, attributing an extra $341 million in costs directly to U.S. tariffs.

‍

As a result, analysts are scaling back their profit forecasts. Average estimates for the MSCI EM Index have fallen by about 1% in the past two months, yet earnings still need to climb 11.4% over the next year to meet current expectations.

‍

Trump’s tariffs aren’t the only headwinds. A price war in China is squeezing consumer-focused firms, while weaker oil prices are hitting producers in the Middle East.

‍

Importantly, the full impact of Trump’s trade measures may not have been felt yet. Many companies rushed shipments to the U.S. before tariff deadlines, creating “front-loading” cushions that will fade in the months ahead, warns Julius Baer’s Dinic.

‍

“For EM earnings, the risk profile increasingly tilts to the downside as the year progresses,” he cautioned.

‍

While emerging-market equities have staged an impressive rally, earnings fundamentals remain shaky. With tariffs, trade frictions, and other macro pressures looming, investors should prepare for volatility and resist being lulled into a false sense of security by headline gains.

‍