CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist
Head of Franklin Templeton Institute
Larry Hatheway
Head of Research
Franklin Templeton Institute
Executive Summary
- Resilience is the key theme for 2026. Markets and economies have held up well despite geopolitical shocks, policy uncertainty and rising inflation. Global growth remains close to trend, supported by consumer spending, business investment, productivity gains and strong corporate profits.
- We expect investment opportunities to broaden across global equity markets, while corporate credit markets should remain stable. Strong earnings in the United States and emerging markets will support a wider set of opportunities across regions and sectors.
- Tighter monetary policy should keep bond yields high and yield curves flat, creating opportunities to earn income. We favor US high-yield credit, select emerging market debt—especially in Latin America—and municipal bonds for US taxpayers.
- Long-term themes remain compelling. Artificial intelligence (AI) is driving demand for energy, infrastructure and broader economic change; rising investment in defense, national security and energy infrastructure create long-term potential return opportunities. Aging populations will require investment in labor-saving technologies, assisted living and health care innovation.
- In private markets and alternatives, secondaries, private credit, real estate and infrastructure offer attractive opportunities.
- Risk to the view. Geopolitical conflict, inflation and a stronger central bank response remain key risks for investors to watch in the second half of 2026.
Introduction
Our original Global Investment Outlook: 2026 and Beyond was built around three cyclical themes—broadening, steepening, and weakening—and three longer-term forces shaping investor portfolios: intelligence, private markets and big government. Midway through 2026, we think that framework still provides a useful starting point, but the balance of risks has changed. Broadening remains firmly intact, supported by resilient economic growth, strong earnings and improving opportunities across regions and asset classes. But steepening of yield curves has given way to higher-for-longer yields, reflecting higher inflation and tighter monetary policies. Higher yields, however, also offer improved income opportunities in shorter-duration holdings, including US high yield and select emerging markets. Meanwhile, the US dollar has firmed and is likely to remain rangebound rather than weak over the remainder of 2026.
Most importantly, the world did not break. Despite war, tariffs, inflation, tighter policy and geopolitical fragmentation, the global economy and financial markets have held together better than many expected. This update therefore reframes the outlook around a single organizing idea: resilience—both the resilience already evident in economies and markets, and the resilience investors may need to build into portfolios for the remainder of the year.
Mid-Year Assessment: How our Calls Landed
Broadening reflected our conviction that investment opportunities across regions and asset classes would continue to expand in 2026. Despite the US-Iran war, soaring energy prices and other uncertainties, that call has turned out to be spot on. It remains our central view for the remainder of this year.
Steepening referred to yield curves, but inflation and tighter policy have instead flattened curves. War-related disruptions to Persian Gulf energy and petrochemical shipments have pushed inflation higher. As a result, markets have shifted from expecting central bank rate cuts to pricing in possible hikes, causing yield curves to bear flatten. Accordingly, we now favor short-duration yield, given attractive income opportunities on offer.
Weakening was about the US dollar. That view was not entirely wrong. The dollar has remained range-bound in the first half of 2026. And that outcome is notable. A major global energy shock should have supported the dollar by improving the US terms of trade. Instead, the dollar has only firmed modestly. That tepid response suggests the era of broad dollar strength is likely over.
A More Resilient Outlook (or Resilience in Markets and Portfolios)
The rest of this outlook is organized around one central idea: resilience. The phrase “the world didn’t break” is not meant to suggest that risks have disappeared or that the outlook is free of strain. Rather, it captures the defining surprise of 2026 so far: economies, markets, companies and investors have absorbed a series of shocks without a sustained breakdown in growth, earnings, credit or global trade. The first sections explain why the global economy and financial markets have held up better than many expected, despite 18 months of geopolitical turbulence, tariffs, war, elections and rising inflation. They also show how resilience has been supported by solid economic growth and strong corporate profits growth across sectors and regions.
From there, we translate resilience into investment implications for equities, fixed income, private markets and alternatives. We also identify key long-term (thematic) opportunities. In all dimensions, we focus on where resilience is apparent and where it can create opportunities for investors in the second half of 2026.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Because municipal bonds are sensitive to interest-rate movements, a municipal bond portfolio’s yield and value will fluctuate with market conditions.
Investments in lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
International investments are subject to special risks, including currency fluctuations and social, economic, and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Alternative strategies may be exposed to potentially significant fluctuations in value.
Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
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