Emerging markets fall into "Trump paradox": Stock market value soared by 4.3 trillion, but corporate profits have been declining for 13 consecutive quarters.

Notice that the beginning of Trump's second presidential term is similar to his first term, both of which were favorable for emerging market stocks. However, due to his trade and fiscal policies eroding business profits, this round of gains may lose momentum. The benchmark MSCI Emerging Markets Index rose continuously from January to August this year, the first eight months of Trump's second term, marking the third time in the 37-year history of tracking emerging markets as an asset class. The previous two instances occurred in 2017 at the start of Trump's first term and in 1993 during the Bill Clinton administration. However, the "Trump rally" masks a concerning fact for emerging market stock investors: while these investors have gained $4.3 trillion in wealth this year, companies in developing countries are under pressure. These companies have not met profit expectations for 2025 and have had an average performance below forecast for 13 consecutive quarters. Profit forecasts have also started to be revised downward, indicating that the situation may worsen further. The divergence between stock market performance and corporate profits is being primarily driven by Trump's policies. His disruptive tariffs and fiscal expansionism have weakened the safe-haven appeal of the US dollar, pushing funds to seek alternative assets. At the same time, technological restrictions and trade barriers have dampened income and profit growth in developing countries from South Korea to Brazil. Ned Dini, a stock strategist at Julius Baer Bank, said, "We remain cautious about emerging market stocks in a global context, as tariff-related risks continue to put more pressure on emerging market sentiment. After the 90-day tariff suspension period, earnings expectations for 2025 are back to a downward trend, reflecting concerns that tariff pressures will intensify in the second half of this year." Earlier in the year, most emerging market fund managers expected Trump's tariffs to delay US monetary easing and increase demand for the US dollar, preparing for a stronger dollar. This led to a weak outlook for developing country stocks, which typically perform poorly when the dollar strengthens. However, Trump's policies ultimately drove global investors to diversify their investments, leading to funds flowing out of the US and weakening the dollar, completely overturning these assumptions. Emerging markets have become the major beneficiaries, with investors optimistic about various themes from Asian AI companies to African miners and frontier market transformation stories. Hussein Malik, a strategist at Tellimer in Dubai, pointed out, "The primary positive impact of the Trump administration on emerging markets has been achieved through a weaker dollar. Ironically, concerns about erosion of checks on the US system have driven capital inflows into emerging markets, which are precisely the asset class linked to that issue." Despite the sentiment-driven rebound giving the impression that emerging markets can withstand trade disruptions, corporate fundamentals tell a different story. Nearly half of the companies in the MSCI Emerging Markets Index have failed to meet analysts' profit expectations this year, averaging nearly 8% lower than expected. Industries such as commodities and industrial exports have been hit hardest. Trump's policies are increasingly becoming a reason for poor performance in financial reports. Samsung Electronics' chip division reported quarterly operating profits 85% lower than expected, shocking investors. The main drag was US export controls leading to increased costs for unsold AI chip inventory. Nomura Holdings data shows that after Trump imposed a 50% tariff on Indian exports, Indian stocks became the most underweighted target for investors. A survey by Bank of America found that this world's fifth-largest economy has gone from the most favored Asian market by fund managers to the least favored market within three months. Tata Motors, the parent company of Jaguar Land Rover, reported a 63% drop in net profit in early August, attributing it to US tariffs, with additional costs totaling $341 million. This prompted analysts to downgrade future 12-month profit forecasts. The MSCI index's average expectations have fallen by about 1% in the past eight weeks. However, profits would still need to grow by 11.4% over the next 12 months to meet current expectations. Trump's tariffs are not the sole threat to business profits. Intense price wars are also weighing down Chinese consumer companies, while falling oil prices are hitting Middle Eastern producers. Dinic of Julius Baer Bank believes that investors may not have fully seen the impact of Trump's tariffs yet, as companies accelerate exports to the US before the tariff deadline. These "pre-export buffers" will gradually diminish in the coming months. He said, "For emerging market returns, this means that as time passes, the risk outlook will tend more towards the downside."