Emerging markets seen overtaking US equities over five years

Global investors are being urged to rethink long-held assumptions about United States stock market dominance after Goldman Sachs projected that emerging market equities and select European stocks are positioned to deliver stronger returns over the next five years. The investment bank’s outlook points to a combination of lower valuations, stronger economic growth prospects and a gradual narrowing of the earnings gap with the US, challenging strategies that have been heavily concentrated in large-cap American technology shares.

Goldman Sachs expects US equities to generate average annual returns of about 5 to 7 per cent over the period, a marked slowdown from the performance seen over the past decade. By contrast, emerging markets are forecast to produce double-digit annualised returns, with economies such as India and Brazil singled out for their structural growth drivers, expanding domestic consumption and improving corporate profitability. Parts of Europe are also expected to outperform, supported by valuation discounts and policy conditions that could favour earnings recovery.

The forecast reflects a broader reassessment of valuation dynamics. US stocks, particularly the largest technology firms that have driven benchmark indices higher, are trading at historically elevated multiples relative to earnings and cash flows. Goldman Sachs analysts argue that these valuations already price in optimistic growth assumptions, leaving limited room for upside surprises. In emerging markets, equity prices remain comparatively subdued despite steady improvements in balance sheets, governance standards and long-term growth potential.

A central theme in the outlook is the growing concentration risk within US markets. The so-called Magnificent Seven technology companies have accounted for a substantial share of index gains, masking weaker performance across the broader market. Goldman Sachs warns that such concentration leaves portfolios vulnerable to shifts in earnings momentum, regulatory pressures or changes in interest rate expectations that disproportionately affect high-growth technology stocks.

Emerging economies, by contrast, offer a more diversified set of growth engines. India’s equity market has been underpinned by sustained economic expansion, public infrastructure spending and a widening base of domestic investors. Corporate earnings growth has remained resilient, supported by financial sector reforms and manufacturing investment. Brazil has benefited from stabilising inflation, a more predictable policy environment and strong demand for commodities, factors that have improved investor confidence and earnings visibility.

The outlook also highlights opportunities in parts of Europe, where equity markets have lagged US peers for years. Lower starting valuations, combined with prospects for easing monetary conditions and targeted fiscal support, are seen as catalysts for improved returns. Goldman Sachs notes that European companies generate a significant share of revenues outside the region, allowing them to benefit from global growth while trading at discounts to US counterparts.

Macroeconomic conditions form another pillar of the forecast. Emerging markets are expected to account for a rising share of global growth over the next five years, driven by demographics, urbanisation and productivity gains. While geopolitical risks and currency volatility remain concerns, Goldman Sachs argues that many emerging economies now have stronger external balances and policy frameworks than in previous cycles, reducing vulnerability to external shocks.

Interest rate dynamics are also expected to play a role. With US rates projected to remain higher for longer than in the previous decade, equity valuations face greater scrutiny. In emerging markets, where monetary tightening cycles have often peaked earlier, there may be more room for rate cuts that support domestic demand and asset prices. This divergence could further tilt relative performance in favour of non-US equities.

Goldman Sachs’ analysis does not dismiss the strengths of US markets, noting that American companies continue to lead in innovation, profitability and capital markets depth. However, it argues that future returns are likely to be more moderate and uneven, making diversification increasingly important. Allocating capital across regions and asset classes is presented as a way to balance growth opportunities with risk management.