Markets broaden, macro returns and AI rewrites the playbook: Franklin Templeton sets out its 2026 outlook

After years in which liquidity, concentration and momentum dominated investor thinking, 2026 is shaping up as a year where fundamentals, diversification and active judgement matter again. In its latest investment outlook, Franklin Templeton’s senior portfolio managers argue that a changing macro regime, accelerating productivity from AI and shifting market leadership are creating both opportunity and risk across equities and fixed income, rewarding investors prepared to look beyond the obvious and stay nimble as the cycle evolves.

Commenting on the US equity market and the technology sector, Jonathan Curtis, co-chief investment officer, Franklin Equity, says: “In 2026, markets seem to be transitioning from a narrow, liquidity-driven regime to one shaped by fundamentals, innovation, and active management. We believe the coming years will reward investors who can distinguish durable innovation from cyclical enthusiasm.”

He added: “At the large-cap end of the market, valuations in the ‘Magnificent Seven’ are often debated, but they are fundamentally explainable. These companies are already monetising artificial intelligence (AI) in meaningful ways, supporting revenue growth while simultaneously driving significant efficiency gains by embedding AI across their operations.

“While valuations may appear elevated on traditional metrics, they often fail to fully reflect the long-term earnings power that AI is likely to unlock for these businesses. Importantly, the US opportunity extends well beyond the largest names. Valuations across the remaining ‘S&P 493’ are, in many cases, quite reasonable.”

Within this group, Curtis says there are numerous knowledge-worker-intensive sectors, such as healthcare and financial services, that should see meaningful operational leverage as AI adoption accelerates. “In addition, there are compelling opportunities among the enablers of AI across industrials, natural resources, and utilities,” he adds.

Commenting on the US equity market, Scott Glasser, chief investment officer, Clearbridge Investments, said: “With capitalisation-weighted versus equal-weighted S&P 500 Index returns at an extreme and an expected rebound in relative earnings growth for the average stock, we expect a broadening of market participation that should benefit more diversified portfolios in 2026.”

Glasser says the “most remarkable” factor driving markets over the last several years has been the resiliency of economic growth. “Front-loaded fiscal stimulus from the ‘One Big Beautiful Bill’ is estimated to add 50–100 basis points to US Gross Domestic Product (GDP) this year and, while there is stimulus for both consumers and corporates from the bill, businesses will be able to immediately deduct capital expenses such as investments in equipment and research and development (R&D). This is expected to bolster overall capital spending, which should broaden and remain strong even if AI capex spending moderates in 2027 and beyond.”

Franklin Templeton believes that monetary policy should also provide a tailwind to the economy although, in its view, to a lesser degree than the market believes as long-dated yields could remain high with some risk to the upside.

“Fortunately, the impact of tariffs, both on supply chains and inflation, has been less inflationary than feared as distributors and manufacturers have been willing to absorb some of the impact,” says Glasser.

“Overall, the effective tariff rate is projected to settle in the 6 per cent–8 per cent range, less than half the assumed rate six months ago, due to a bevy of carve-outs and exemptions that have mitigated the impact.”

Commenting on the US fixed income markets, Sonal Desai, chief investment officer, Franklin Templeton Fixed Income, says: “We expect the faster pace of productivity growth that we have enjoyed over the past couple of years should be sustained into 2026 and beyond. For financial markets, macro is back in the driver’s seat in a way we haven’t seen in some time, Zero Interest Rate Policy is a fond distant memory, carry has its due, and the regime shift is bigger than just rates: a more multi-polar geopolitical order, China’s structural slowdown, Japan’s reflation, Europe’s planned defense (sic) spending boost, and AI advances which could extend the productivity renaissance.”

Against a “constructive, though uneven, growth backdrop,” the firm does not expect a sharp rise in corporate defaults, but with spreads near record tights and heavy issuance, it feels further tightening looks limited. “We think the Fed will be cautious on additional easing, especially if fiscal tailwinds keep inflation sticky, so duration looks unattractive and investors would be wise to stay nimble while harvesting today’s attractive yields,” says Desai.

“With the US dollar still historically strong despite 2025’s depreciation, we believe global and emerging market diversification will likely play an increasingly important role in 2026 investment strategies. Finally, with valuations elevated and labour dynamics challenged, US growth looks increasingly levered to AI capex and the equity wealth effect, in our view creating clear winners and losers and making active management critical to navigate volatility and find the best pockets of value.”

Nicholas Way

Nicholas Way is a contributing editor at The Inside Adviser and has covered business, retirement, politics, human resources and personal investment over a 50-year career.