Global Equity Market Rotation: Rebalancing Toward Emerging Markets and Cyclical Sectors

The global equity market has witnessed a significant rotation in 2024–2025, with investors increasingly reallocating capital toward emerging markets (EM) and cyclical sectors. This shift reflects a combination of macroeconomic tailwinds, valuation attractiveness, and strategic rebalancing efforts by index providers and institutional investors. As central banks in developed markets signal a potential easing cycle and EM economies stabilize, the case for EM equities and cyclical sectors has strengthened.

Emerging Markets: A New Era of Momentum

Emerging markets have surged in 2025, with the MSCI EM Index up nearly 27% year-to-date, driven largely by China's technology sector and broader EM policy stimulus. This momentum has prompted a reevaluation of EM equities, which now trade at a 12.4x forward P/E ratio-near their 25-year average- compared to richer valuations in developed markets. WisdomTree's recent rebalancing of its Emerging Markets Dividend Indexes underscores this trend, with a strategic shift toward higher-quality companies. The rebalance reduced exposure to cyclical sectors like Energy and Financials while increasing allocations to Consumer Staples and Information Technology, resulting in improved profitability metrics such as return on equity (ROE) and shareholder yield.

J.P. Morgan and Vanguard highlight the macroeconomic underpinnings of this rotation. EM growth is projected to slow to 2.4% annually in the second half of 2025, but central banks in countries like India and Brazil are expected to continue rate cuts as inflation eases. Meanwhile, Vanguard notes that developed economies, particularly the U.S., are nearing their inflation targets, creating a more favorable environment for EM markets to outperform.

Cyclical Sectors: Resilience Amid Global Uncertainty

Cyclical sectors in EM have shown remarkable resilience despite global trade tensions and manufacturing headwinds. In Q2 2025, the industrials and consumer discretionary sectors in EM markets returned 12.9% and 11.5%, respectively, outperforming their developed market counterparts. This performance was driven by expansionary policies in key EM economies, a weaker U.S. dollar, and anticipatory demand ahead of potential tariff hikes.

However, earnings growth in these sectors has been mixed. While industrials benefited from infrastructure spending and trade liberalization outside the U.S., consumer discretionary faced margin pressures due to affordability constraints and rising import costs. Despite these challenges, the broader EM industrial sector remains undervalued compared to developed markets, with P/E ratios for non-U.S. industrials significantly lower than those in the U.S.

Strategic Rebalancing: Quality Over Hype

The rebalancing of EM indices toward quality metrics reflects a disciplined approach to capturing both income and growth. WisdomTree's adjustments, for instance, prioritized companies with stronger ROE and dividend yields, reducing exposure to sectors with weaker fundamentals. This strategy aligns with broader market trends, as investors seek to mitigate risks from geopolitical uncertainties and trade policy shifts.

Looking ahead, the rotation into cyclical sectors is expected to accelerate in 2026, supported by AI-driven productivity gains and monetary easing in EM economies. Small-cap and bank stocks, in particular, are positioned to benefit from fiscal stimulus and lower borrowing costs.

Conclusion

The current rotation into emerging markets and cyclical sectors represents a strategic response to evolving macroeconomic dynamics. With EM equities trading at attractive valuations and cyclical sectors demonstrating resilience, investors are increasingly favoring these markets for growth and income. As central banks continue to ease and global trade tensions moderate, the case for rebalancing portfolios toward EM and cyclical sectors appears compelling.