Not many expected that Asian equities would outperform the US heading into 2026.
US equities as currently struggling to hold their ground as volatility picks up and investors are becoming anxious.
For investors used to seeing Asia lag until Wall Street gives permission, that reversal deserves more than a passing glance.
Analysts and investors are trying to figure out if this is a “one-off” event or a sign of something deeper that is rattling the global markets.
Are Asian markets really outperforming?
By the end of January, MSCI Asia ex-Japan was up in the high single digits on a total return basis, putting it on track for its strongest month in nearly three years.
The S&P 500 delivered only low single-digit gains in January, and did so unevenly, with large intraday swings driven by a handful of companies.
This gap is appearing from very different starting points.
US equities entered the year at record highs with valuations already reflecting strong earnings growth and stable policy.
Meanwhile, Asian equities entered the year priced for caution, slower growth, and persistent geopolitical risk.
Outperformance from that position tends to mean something different.
What also stands out is where the gains are coming from.
In Asia, strength has been broad.
Korea and Taiwan have benefited from the semiconductor cycle, Japan has seen steady inflows tied to corporate reforms, and parts of Southeast Asia have gained from supply chain investment.
In the US, index performance has remained tightly linked to a small group of technology companies.
When one of them disappoints, the index feels it immediately.
The currency effect investors often miss
Equity returns rarely travel alone. Over the past decade, a strong dollar often erased much of Asia’s local market performance for global investors, but things have changed now.
Since late 2025, several Asian currencies have stabilized or appreciated, even during periods of market stress.
The Korean won is a good example. After a sharp slide earlier in the year, it recovered as US Treasury officials pushed back against moves that appeared disconnected from fundamentals.
Similar patterns can be seen in Taiwan and Singapore.
This means that the currency no longer acts as a constant headwind.
When local equity gains are no longer offset by FX losses, global returns improve even if local markets do nothing extraordinary.
It also changes investor behavior, as allocators become more willing to buy dips when they are not also betting against the currency.
Meanwhile, the dollar has become less reliable as a one-way hedge.
Fiscal expansion, tariff uncertainty, and political noise have reduced its role as the default safety valve.
That does not mean a dollar collapse. It does mean the advantage US assets enjoyed from currency alone is no longer automatic.
Earnings breadth versus earnings dependence
The most important difference between Asia and the US right now sits inside earnings, not macro forecasts.
US equity performance remains highly dependent on a small group of companies delivering exactly what markets expect.
The recent selloff in Microsoft after strong headline earnings showed this clearly.
Profits beat estimates, yet concerns about cloud growth and AI investment timelines wiped out hundreds of billions in market value in a single session.
Asia looks different. Semiconductor supply chains benefit earlier in the cycle, long before end demand fully shows up in revenue.
Equipment makers, materials suppliers, and manufacturers see orders rise while monetization questions are still being debated elsewhere.
On top of that, Asia’s earnings are supported by sectors that have little to do with AI hype, including shipbuilding, capital goods, and energy transition infrastructure.
Corporate behavior also plays a role. Japan’s push for higher returns on equity and better capital allocation has translated into buybacks and dividends that anchor valuations.
Korea is moving more slowly, but directionally, the same pressure exists. These changes do not create headlines. They do, however, change how downside risk is absorbed.
Valuation tells a story about risk, not optimism
Asian equities still trade at a discount to US markets. That fact alone is not new. What is new is how that discount lines up with actual risk.
Asia remains priced for problems investors already understand. Slower Chinese growth, trade friction, governance concerns, and regional geopolitics are embedded in valuations.
For many markets, the bar for positive surprise is low.
US equities are priced for delivery. Growth must continue. Margins must hold. Regulation must remain manageable.
Any deviation forces repricing, as recent earnings reactions show.
This difference explains why capital flows have started to move. In January, emerging market and Asia-focused ETFs saw net inflows while US equity flows turned selective.
This is not leverage chasing returns. It is reallocation away from crowded trades where expectations are already high.
There is also a policy angle.
The Federal Reserve has little room to act quickly without risking inflation optics or political backlash.
Several Asian policymakers retain more flexibility, whether through tolerance for modest inflation or targeted support for strategic industries.
Markets value that optionality even when it is not immediately used.
The story does not rely on Asia becoming the world’s growth engine overnight.
It rests on relative pricing. As long as US equities demand near-perfect execution and Asia does not, the balance of risk and reward stays tilted.
Asian equities will not rise in a straight line. They will react sharply to China headlines, trade disputes, and currency moves.
Yet for the first time in years, investors are responding differently. Weakness is being bought rather than feared.
US disappointments are being sold rather than explained away.
That behavioral change tends to last longer than a single earnings season.
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