Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms
Key Points:
- Equity volatility hit its highest since the end of April 2025 on renewed U.S.-China trade tariff concerns
- Private credit markets in focus, pushing U.S. high yield spreads to their widest since mid-June 2025. Investment grade spreads remain near their five-year tights
- Strongest EM equity YTD performance since 2009 & largest outperformance vs. QQQ since 2016. But institutional investors remain under-indexed to dedicated EM equity exposure
Summary
With U.S. equity volatility receding to below the five-year average of around 20 on the VIX after Q2 peak trade tariff concerns, markets became relatively complacent. Then the renewed U.S.-China trade spat briefly pushed VIX above 25 on October 16th. More importantly, it served as a reminder that while the global economy avoided the worst-case scenarios of a trade war post the U.S.’s original announcement on April 2nd, trade tariff uncertainties linger.
Adding to the latest market cross-currents are pockets of private credit stresses via a handful of bankruptcies and regional bank exposures. These concerns were visible through wider U.S. high yield spreads relative to Treasurys, and a sell-off in banks and publicly traded private market and alternative investment managers. However, with investment grade spreads remaining behaved, this is not being viewed as a systemic issue for now.
Amidst the shifting global backdrop, a historically weaker USD (worst three quarter return since 1986), and AI tailwinds also benefiting companies outside of the U.S., EM equities have had their best YTD returns since the immediate aftermath of the Great Financial Crisis (GFC). This illustrates the ongoing expansion of the opportunity set for investors as we have discussed in prior pieces.
Biweekly Chart in Focus: Equity volatility briefly spiked on U.S.-China trade concerns
Source: Bloomberg
Details
Trade tariff uncertainties linger
In response to U.S. trade tariffs, China expanded its export controls on certain rare earth products on October 9th. Rare earth elements are essential inputs into common electrical products such as computer hard drives, television and computer screens, and also into more advanced goods such as electric vehicles (EVs), fighter jets, and MRI scanners.
The International Energy Agency (IEA) estimates that China accounts for around 61% of rare earth production and 92% of the processing. China is a vital source of U.S. rare earth materials as a U.S. government report noted that between 2020 and 2023, the U.S. imported 70% of all its rare earth compounds and metals from China. In response to export controls, President Trump threatened a new 100% tariff on China. Although in flux, he is slated to meet with Chinese President Xi at the end of this month in South Korea at the annual Asia-Pacific Economic Cooperation summit where it is expected this and broader trade issues will be discussed. The latest trade tariff truce between the two countries is set to expire on November 10th.
As trade policy uncertainties resurfaced, equity volatility moved higher—see our Biweekly Chart in Focus above. The VIX has since receded as rhetoric has softened (for now) and the markets focus on Q3 earnings season which unofficially began on October 14th with the large banks reporting. Around 60% of S&P 500 market cap was slated to report this past week (16%) and the week of October 27th (44%). This includes notable mega cap technology companies which continue to be the signposts for the AI secular theme, including: Alphabet, Meta, and Microsoft (October 29th); Amazon and Apple (October 30th). The AI bellwether, NVDA, reports on November 19th. For a Q3 earnings preview, please refer to our prior piece.
Private credit concerns
Markets were also rattled by two auto industry private credit issuer defaults (First Brands (auto parts manufacturer) and Tricolor (subprime auto finance and dealership)). These seem to be isolated stories of limited financial transparency and potential fraud, respectively. Then, two regional banks (Zion and Western Alliance) reported losses due to exposures to bad loans on their balance sheets while an investment bank (Jefferies) reported that a hedge fund and CLOs it manages had direct and indirect exposure to First Brands.
These developments led to the first weekly outflows from U.S. high yield bond funds since April 2025, per EPFR data via Bank of America Merrill Lynch. Though still subdued, U.S. high yield spreads relative to 10-year Treasury yields rose to their widest since mid-June 2025. However, U.S. investment grade spreads remained in check suggesting that the markets do not see this as a systemic issue (Figure 2). While seemingly analogous to the regional banking crisis in March 2023—which proved to be an isolated event—investors should remain vigilant and monitor credit market trends for signs of broader contagion.
Figure 2: U.S. high-yield spreads rose to a 4-month high while investment grade spreads barely inched up off of their 5-year tights
Source: Bloomberg
As an equity proxy, despite solid Q3 earnings reports by the large banks thus far, the KBW Banks Index (BKX) fell by over 6% at its lows from the September 24th First Brands bankruptcy news. However, it has clawed back around half of those losses as the dust settled and the markets view these as idiosyncratic issues.
The latest data from Nasdaq eVestment—which has approximately $90 trillion in public assets represented globally across asset owners, asset managers, and investment consultants, and 65,000 private markets funds on its platform—shows how private debt remains a favored asset class by asset owners (Figure 3).
Figure 3: Private credit/debt continues to outpace traditional fixed income market in terms of public plan commitments (% of dollar total)
Source: Nasdaq eVestment
Private debt exposure has grown over the past few years despite moderating demand for other private markets and alternative strategies. This comes against the backdrop of nearly 86% of global public fixed income yielding less than 5%, juxtaposed against nominal discount rates in the 5% to 7% range for most public pensions (Figure 4)—speaks to the need for higher yields for certain investors. Despite a four-fold increase since 2003 (from 1.7%), private credit only accounts for 7% of the total U.S. credit market (per Apollo Group).
Figure 4: 86% of global public fixed income outstanding trades with a yield below 5%
Source: Apollo Group
EM equity performance & drivers
The aforementioned market jitters spurred a flight to safety as 10-year Treasury yields are under 4%. Also pushing yields lower is the markets pricing in sequential, full 25 basis point Federal Reserve rate cuts on October 29th and December 10th, increased expectations of the Fed ending Quantitative Tightening (QT) following Fed Chair Powell’s comments on October 14th, and falling inflation expectations as WTI oil hit five month lows. As the ongoing U.S. government shutdown 1) interrupts economic data releases and prevents the Fed from gaining further clarity on the factors impacting its monetary policies, and 2) has the potential to more significantly impact the economy the longer it persists, these are likely also contributing to increased Fed rate cut expectations.
The trade-weighted USD index (DXY) has stabilized and stopped weakening after its precipitous YTD decline (currently -9%). But enough damage has been done to fuel EM equities to their highest level in over four years (Figure 5). Even if the USD does not materially weaken from here, as long as it does not meaningfully appreciate, it can still be a key support for this asset class.
Figure 5: USD weakness has been a key tailwind for EM equities
Source: Bloomberg
While the AI secular theme is most commonly linked to the U.S. ecosystem, there are also EM beneficiaries: TSMC (nearly 12% of EEM), SK Hynix (around 2% of EEM), and the broader EM technology sector (over 27% of EEM). The weaker USD, lower U.S. rates, the global AI revolution, and targeted Chinese stimulus to support weaker economic activity and the ongoing property market crisis, have contributed to EEM appreciating by over 31% YTD. This is its largest gain at this point of a year since the nearly 57% spike in 2009 amidst massive Chinese fiscal and monetary stimulus, and the Fed’s QE1 in response to the GFC.
EEM has outperformed the Invesco QQQ ETF, which tracks the Nasdaq-100® Index (NDX®), on a relative basis by more than 11% YTD—its widest gap since 2016. The bottom-up fundamentals also speak to the strong price returns as EM equities’ 2026 EPS are slated to grow by 17% year-over-year. This would be the largest increase since the Covid snapback in 2021 (Figure 6). Consequently, the strategic case for EM equities as a diversifier for global portfolios (e.g., supportive U.S. dollar, rates, and Fed policies; AI secular theme; favorable relative valuations versus U.S. equities; earnings growth) has continued to take shape.
Figure 6: EM EPS slated to grow by 17% year-over-year in 2026, largest increase since 2021
Source: Bloomberg. Notes: MSCI EM EPS actual & estimated YoY%
Another tailwind is investor under-positioning in EM equities. Per Nasdaq eVestment data in Figure 7, institutional investors are underweight EM equities relative to a 60/40 benchmark of global equities and bonds. EM equities are around 10% of the MSCI All-Country World Index which would result in a theoretical 6% benchmark weight for EM equities—leaving institutional investors in the U.S., Europe, and Japan underexposed to dedicated EM managers.
Figure 7: Global institutional investors under-indexed to dedicated EM equity exposure
Source: Nasdaq eVestment. Long-only asset allocation estimates by investor domicile, as of Q2 2025.
Downside risks for the asset class include:
- a reescalation in broader U.S. trade tariffs—not only as they pertain to China (almost 29% of EEM) but other EM economies as well, such as India (nearly 16% of EEM),
- an about face in Fed policy which pushes the USD materially higher and tightens global financial conditions (e.g., stemming from a reacceleration in inflation), and/or
- a material weakening of global economic activity.
Tactically, despite its strong YTD relative performance, per our September 4th report, when EEM outperforms QQQ by more than 1 standard deviation relative to its mean over the past 10 years—eclipsed in May 2025—it has outperformed only 5% of the time over the next six months and underperforms by an average of -11%.
An updated Figure 8 shows this trend holding true as it has underperformed QQQ over the last six months by nearly -7%. The read-through is that 1) the damage to U.S. equities was done earlier in the year leading up to and in the immediate aftermath of peak trade tariff concerns, and 2) although AI is a global theme, investors have continued to favor the U.S. AI champions, hyperscalers, and other perceived beneficiaries.
Figure 8: While outperforming QQQ YTD, EEM has underperformed the last 6 months after hitting +1SD in May 2025
Source: Bloomberg
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