AI enthusiasm overwhelms war panic; profit forecasts in emerging markets reach record highs.

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As tensions in the Middle East unsettle global markets, robust AI demand from Asian tech giants is driving profit expectations for emerging market companies to record highs, but whether the ceasefire agreement can be sustained remains the biggest uncertainty.

According to Bloomberg data, analysts have raised profit expectations for MSCI Emerging Markets Index constituents by 23%, marking the fastest rise since 2009. Even with the outbreak of conflict in the Middle East, expectations continue to climb, up nearly six percentage points in the past six weeks. This means that constituents of the index are expected to see nearly 50% earnings-per-share growth in the next 12 months, with profit forecasts set to reach a historic high.

Currently, emerging market stocks remain about 3% below pre-war levels, but strategists from Citi and Goldman Sachs both believe that the sustained upward revision in profit expectations is laying the foundation for a strong market recovery. Last week, Citi included the South Korean stock market in its recommended portfolio and noted that rising forward earnings-per-share forecasts are making risk assets in emerging markets attractive again.

Resilient AI chip demand supports profit upgrades

The core driving force behind this round of profit expectation upgrades comes from Asian tech companies supporting the hardware for Silicon Valley's AI infrastructure. Data from Samsung Electronics and TSMC show that even in the early stages of the conflict, AI chip demand remained robust.

"The core driver is, of course, the capital expenditure by the US hyperscale cloud computing companies," said Archie Hart, portfolio manager at Ninety One UK Ltd. "This is, in effect, an AI gold rush, and Asia is manufacturing the ‘pickaxes and shovels’ for American large language models and hyperscale cloud companies."

South Korea and China contributed the largest share of profit upgrades. Hart also noted that the upgrading trend is spreading to the industrial sector—companies supplying supporting equipment for AI and defense infrastructure. Meanwhile, profit expectations in the commodities and energy sectors are also rising, with the latter benefiting from higher oil prices.

The sustainability of the ceasefire is the biggest risk

Optimism is not without risks. Manik Narain, Head of Emerging Markets Strategy at UBS Group, pointed out that consensus market profit estimates have not yet fully reflected the risks of slowing economic growth. He estimates that if the conflict continues through April, earnings-per-share forecasts will face around a 10% downward pressure, with emerging market stock valuations slightly above historical averages, "which isn't cheap given the current backdrop and elevated US Treasury yields."

Hart also agrees that if oil prices remain at current levels, concerns over inflation, borrowing costs, and economic growth could reverse the optimistic profit outlook. He stated: "If the initial ceasefire agreement in the Gulf region fails to hold, renewed conflict could push the world into recession, and all profit forecasts would be rendered invalid."

Whether the Strait of Hormuz can reopen soon and whether the two-week ceasefire agreement can be extended will be key to realizing the above optimistic expectations.

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