HONG KONG: BEFORE the Iran war broke out, Asian equities were rallying on the back of an earnings boom driven by artificial intelligence enthusiasm and commodity exports – not domestic consumption. The Middle East conflict is now stress-testing just how exposed that model is.
Asia's markets took the sharpest hit from the Iran war-related energy shock, underscoring the region’s reliance on Middle Eastern energy. South Korea was emblematic: the KOSPI index .KS11suffered its worst-ever daily percentage loss on March 4, plunging more than 12%.
Leading up to the Middle East crisis, Asian stocks were enjoying a healthy rally driven not by investors' willingness to pay ever-higher price-to-earnings (PE) multiples – as was the case in 2024 and much of 2025 – but by an improving earnings outlook.
Since late October, upgrades to earnings estimates have boosted Asian stock prices even as forward PE multiples have fallen.
The 12-month forward PE for Asian stocks peaked at 16.8x on October 9, according to FactSet consensus estimates. Since then, the index has risen 6.4% while the forward PE has declined 11%, indicating a 17% upgrade to 12-month forward earnings per share (EPS) in about five and a half months.
South Korea’s earnings upswing was the starkest. From October 27 through February 27 – the day before the joint U.S.-Israeli strike on Iran – the market had appreciated roughly 55%, while its forward PE had declined by 16%. Taiwan came in a distant second, with 19% market appreciation and a 2% PE decline over that period. Both markets have since seen pullbacks of 8% and 4%, respectively.
Still, the sharp divergence between market performance and forward PE in Asian markets over the past six months is notable – and quite rare. Since the 2008 global financial crisis, it has happened only twice: from July 2009 to July 2010 and from September 2016 to January 2018. In both episodes, earnings upgrades were driven by large liquidity injections that fuelled consumption and investment booms.
The cause of the discrepancy this time around is clear: the AI boom. Asian stocks with the biggest earnings upgrades all have an outsized role in the AI infrastructure supply chain.
TECH DOMINANCE
Korean and Taiwanese stocks are in the lead here. Consensus EPS estimates for Korean equities surged over 76% in the past six months, while those for Taiwan’s stocks jumped 19%.
That’s unsurprising as technology represents 42% of the Korean market and over 70% of the Taiwanese index, according to FactSet.
Taiwan Semiconductor Manufacturing 2330.TWand Korean tech giants like Samsung Electronics005930.KS and SK Hynix 000660.KS have seen their earnings turbocharged by skyrocketing prices for memory chips given the current imbalance between global supply and the insatiable AI demand.
The AI data centre boom – as well as rising investment in defence and infrastructure globally – has also pushed up earnings estimates significantly in the materials sectors in China, the Philippines, Malaysia and Indonesia. This reflects surging copper, aluminium, zinc and precious metal prices.
Korean aerospace and defence companies have also seen earnings outlooks rise as geopolitical risk has skyrocketed.
In short, Asia’s current earnings upgrade boom is being driven almost entirely by global megatrends – not domestic fundamentals.
CAN THIS LAST?
Against this backdrop, an obvious question needs to be asked: how sustainable are Asian earnings upgrades?
First, there’s the AI story. Semiconductors and memory chips are inherently cyclical businesses. Today's shortage may persist well into 2027, but new capacities could eventually come online.
Moreover, the durability of the high-tech capex binge has been questioned for months, given the questionable profitability of the investments and the logistical hurdles hyperscalers could face.
Now, add to this spiking energy prices and potential shortages of raw materials caused by the Iran war. This all calls into question the longevity of the outsized earnings at Asia's AI "pick-and-shovel" providers.
Of course, the conflict could boost shares of global defence companies and push materials prices even higher – but if Asian companies are struggling to access the energy they need to function, they are unlikely to benefit.
DOMESTIC CONSUMER LAGS
If the global megatrends supporting Asian equities do cool, domestic consumers will have to pick up the slack.
However, for now, domestic consumption is Asia's Achilles' heel. Year-on-year retail sales growth is around 1% in China, Korea and Taiwan. India and Vietnam, with roughly 8-10% retail sales growth, are faring marginally better.
It’s notable that domestic consumption-driven sectors, like consumer discretionaries, consumer staples, retail, e-commerce, healthcare, media and telecommunications, were mostly absent from the list of Asia’s top earnings estimate gainers.
Instead, these sectors dominated the list of the top 25 earnings "losers" - market sectors with the largest earnings downgrades – with eight in India, a consumption-driven economy.
North Asia’s consumption-focused sectors have not performed as poorly, but many have still suffered considerable EPS downgrades in the past six months, as intense domestic competition in China has squeezed margins.
Asia's earnings boom thus hasn’t been built on rock, but on other people's demand. With the world now facing a global energy shock, the foundation of the Asian equity story will be tested mightily.
The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific Equity Research at BNP Paribas Securities/via REUTERS
