Emerging markets (EM), one of the most unloved asset classes of the past few years, have recently proven to be a bright star in the market. As global equities posted another strong week (hitting fresh year-to-date highs across a number of markets), EM continued to strengthen. Its success thus far in 2016 raises a question on an asset class that has struggled for most of the past five years: Is EM finally back?

The EM asset class posted a great first quarter, gaining 5.7%, as measured by the MSCI Emerging Markets Index. Several EM markets did exceptionally well, with the MSCI Latin America and MSCI EM Eastern Europe indices posting advances of +19.1% and +15.0%, respectively. Higher commodity prices, combined with an improving investor risk appetite and dovish global central banks, as well as a weakening dollar, helped to fuel much of the rally. EM’s success this year has been a great trend reversal of losses in the past three calendar years, including a -14.9% decline in 2015.

Its struggles have also negatively affected well-diversified portfolios, which have experienced a rally driven predominantly by US large cap over the past three years. Although we have definitely seen weak years recently for EM, it is important to remember that it can often lead by very wide margins. Over the 10-year decade from 2000-2009, in which the S&P 500 posted a loss of 9.1%, the MSCI Emerging Markets Index gained 154%, easily outpacing most major asset classes.

Despite its struggles of the past few years, strong reasons support owning EM, many of which investors have ignored. From a valuation perspective, MSCI Emerging Markets are trading at a forward P/E of 11.9, compared with 15.6 for the MSCI ACWI Index, and 17 for the S&P 500 Index, and also at a lower relative value from historical levels. From a diversification standpoint, owning EM helps portfolios gain access to countries that are experiencing growth at different times in their economic cycles, and often at higher rates, than the U.S.

Much of the negativity surrounding EM in 2015 was the Federal Reserve’s (Fed) looming rate hikes and the potential negative impact they would have on developing countries. Heading into 2016, the Fed was expected to raise rates four times this year. However, weaker-than-expected global economic data and indications from the Federal Open Market Committee (FOMC) suggest that we are still a ways off from the Fed’s moving aggressively to raise rates.

For the time being, EWM believes EM is definitely back. Whether the trend continues for investors buying into the story of a recently unloved asset class, or we see another reversal out of EM, only time will tell. One thing is certain: EM has posted outstanding gains in the past, often when other asset classes are struggling, and its success may mark the return of diversification.

As the stock market pulled off another dramatic, V-shape turnaround, and the S&P 500 Index is once again within striking distance of its all-time high, the discussion has intensified as to whether or not the stock market is overvalued. Although valuation is never a good market-timing tool for short-term traders, price does matter, especially for long-term investors.

Much confusion exists on how to value the stock market. Different market commentators use various valuation measures, whether due to their diverse schools of thought or their dissimilar views that support their own interpretation of the market. For example, someone making a strong case for the market being grossly overvalued will use the most conservative earnings measures, such as normalized or inflation-adjusted earnings. On the other hand, those aspiring to convince the public that the market is cheap may rely on more “lenient”, or growth-oriented earnings measures, such as EBITDA or out-year earnings projections.

The stock market, and rightfully so, is the Price-to-NTM (next-twelve-month) consensus earnings estimate. For example, if the S&P 500 Index stands at 2000, and the NTM consensus earnings estimate is $120 per share, the stock market is valued at 16.7 times forward earnings.  This figure is slightly higher than the long-term average of approximately 15 times forward earnings.

Another widely used measure is Price-to-LTM (last-twelve-month) earnings. Since investing in the stock market is based on a company’s future earnings, this backward-looking measure is not considered relevant for decision making.  That is because it generally overstates how expensive the market is, as aggregate corporate earnings generally grow year after year.

It is worth mentioning that NTM consensus earnings are a recurring, pro-forma earnings estimate that excludes one-time items, such as write-downs or write-ups of asset values. These earnings are not strictly compliant with GAAP earnings, and pro-forma numbers do not have a good reputation (as some corporate crooks have abused them to mislead investors). But it is appropriate to use them for a stock market comprising hundreds, if not thousands, of companies, as one-time items of a host of them tend to offset each other, especially over time.

The S&P 500 Index consensus earnings estimate currently stands at $119 per share for 2016, and $135 per share for 2017. At the April 7 close of 2041.91, the Index trades at 17.2 times 2016 consensus earnings estimate. It is no doubt expensive, but if the 2017 estimate of $135 per share holds (+13.4% growth over 2016), the multiple will drop to just 15.1 at year end, based on the Index’s current level, and close to its long-term average. Of course, the consensus earnings estimates for 2016 and 2017 are anything but certain, since they are subject to frequent (if not significant) revisions as the macroeconomic environment evolves and companies update their earnings projections. They are imperfect, moving targets, but they do provide a rough estimate of how cheap or expensive the stock market is.