Emerging markets stocks are making a comeback and may even outpace the S&P 500 next year, analysts say

• Emerging markets are expected to outperform the S&P 500 next year, Goldman Sachs estimated.
• The overall MSCI Index is expected to see returns of 13.8% in 2024, more than the S&P 500's 8.2%.

After enduring a series of headwinds in recent years, emerging markets are rebounding and poised to beat US stocks next year, according to Goldman Sachs.

A "triple whammy" of higher US interest rates, a strong dollar and slower China growth weighed on emerging markets earlier. But the MSCI China Index is up 6.25% so far this month, MSCI Brazil is up 8.01%, and MSCI South Korea is up 13.21%.

And that growth is expected to continue. According to Goldman Sachs analysts, the overall MSCI Index is expected to see returns of 13.8% in 2024, higher than the 8.2% boost forecasted for the S&P 500.

"With disinflation progressing well globally, and the US (and other G10 central banks) largely done hiking rates, what lies on the other side of this storm for EM assets? A more benign global and EM macro outlook – with steady growth, lower inflation and the potential for rate cuts," analysts wrote in a note released Wednesday.

Meanwhile, DataTrek analysts wrote in a note also published Wednesday that this year's fourth quarter is shaping up to be "a race between the favorite (S&P 500) and the underdog (Emerging Markets)."

Driving that emerging market outperformance is the tech sector. For example, Taiwan Semiconductor Manufacturing is up 14% this quarter, and South Korea's Hynix, also a chip company, is up 17%.

Recent optimism around an end to the Fed's rate hikes also bodes well for emerging markets. Following a cool inflation report on Tuesday, the dollar slipped lower and Treasury yields plunged to 4.46%.

"When [the dollar] weakens, as is the case this quarter, it means asset owners are adding risk to their portfolios by moving capital outside the US," DataTrek said.