If US stocks disappoint, this overlooked ASX ETF could matter a lot more

For more than a decade, US stocks have done the heavy lifting for global equity returns. 

From Big Tech dominance to relentless earnings growth, American markets have rewarded investors who stayed the course.

However, thoughtful investors know markets move in cycles. Leadership changes. And when one region stumbles or simply delivers more modest returns, others can quietly step into the spotlight.

That is where emerging markets may come back into focus and why this ASX ETF could be an opportunity if US stocks disappoint.

A strong but narrowing US run

There is no denying the strength of the US markets in recent years. In 2025, American shares delivered a better-than-average year, supported by resilient consumer demand, strong corporate balance sheets, and the obvious enthusiasm for artificial intelligence and productivity gains. ETF investors did well, with total returns, including dividends, of 17.88% for the 2025 calendar year.

However, that performance has also led to concentration risk. A small number of mega-cap companies now account for a significant share of index returns. Valuations were elevated by historical standards, and expectations for continued earnings growth are high in 2026.

If those expectations are merely met — rather than exceeded — future returns may be more subdued.

This does not mean US stocks are destined to fall. It simply raises a reasonable “what if” question for long-term investors building diversified portfolios.

Emerging markets quietly outperformed in 2025

While US stocks captured headlines, emerging markets delivered a quietly impressive year in 2025.

Across Asia, Latin America, and parts of Eastern Europe, equity markets benefited from easing inflation pressures, stabilising interest rates, and improving economic momentum. In several regions, earnings growth outpaced developed markets, helped by younger populations, rising consumption, and improving productivity.

Importantly, emerging markets entered 2025 from a position of relative valuation discount after years of underperformance. That combination — improving fundamentals and lower starting valuations — helped produce returns that rivalled, and in some cases exceeded, those of the US.

Why 2026 could keep the theme alive

Looking ahead to 2026, several structural factors continue to support the emerging markets case.

Many emerging economies now have healthier balance sheets than in past cycles, with higher foreign exchange reserves and more flexible currencies. Supply chains are also diversifying, with manufacturing, energy, and technology investment spreading beyond traditional developed markets.

At the same time, demographic trends remain favourable. Growing middle classes across Asia and parts of Latin America continue to drive demand for housing, healthcare, financial services, and technology.

None of this guarantees another strong year. But it does suggest emerging markets remain relevant for investors thinking beyond a single economic cycle.

One simple way to gain exposure

For Australian investors, the iShares MSCI Emerging Markets ETF (ASX: IEM) offers a straightforward way to access this theme.

Rather than betting on individual countries or companies, the ETF provides broad exposure across dozens of emerging economies and hundreds of businesses. That diversification matters in a region where political, regulatory, and economic conditions can change quickly.

For long-term investors, it can act as a complement to US-heavy portfolios, helping reduce reliance on a single market driving returns.

Foolish Takeaway

This is not a call to abandon US stocks. They remain home to some of the world’s strongest businesses.

However, if US markets deliver more modest returns in the years ahead, emerging markets could matter a lot more than many investors expect. Having diversified exposure in place before leadership changes is often easier than reacting after the fact.

The post If US stocks disappoint, this overlooked ASX ETF could matter a lot more appeared first on The Motley Fool Australia.

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Motley Fool contributor Leigh Gant has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended iShares S&P 500 ETF. The Motley Fool Australia has recommended iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.