Franklin Templeton's mid-year case for a broader bull market

Eighteen months of war, tariffs, elections and surging energy prices. For most of 2026, investors have been bracing for something to snap.

It hasn’t.

The world didn’t break and that is the central message from the Franklin Templeton mid-year outlook. The outlook frames the defining investment story of 2026 as one of unexpected resilience.

Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, describes a market that has defied the pessimists at every turn.

“Economies, markets, companies and investors have absorbed a series of shocks without a sustained breakdown in growth, earnings, credit or global trade.”

That view is grounded in Franklin Templeton’s own track record. At the start of 2026, the firm forecast that investment opportunities would continue expanding across regions and asset classes. Despite the US-Iran war and soaring energy prices, that call has proved correct.

“That call has turned out to be spot on,” Dover said. “It remains our central view for the remainder of this year.”

Equities: a broadening story

The earnings data makes a compelling case. S&P 500 earnings per share are expected to rise about 15 per cent in 2026.

More striking is what has happened to the market’s price-to-earnings (P/E) multiple: even as the S&P 500 Index has risen nearly 7 per cent in the first half of the year, its forward P/E has declined. Earnings growth, not investor exuberance, is driving the market forward.

“Investors have remained disciplined despite higher geopolitical risk, and to us the US equity market does not appear stretched,” Dover said.

The Franklin Templeton mid-year outlook expects leadership to broaden beyond large-cap technology in the second half of 2026. US small- and mid-cap equities, emerging markets and Japan are all becoming more attractive as earnings improve.

The Russell 2000 Value Index has already validated that rotation, gaining nearly 17 per cent year-to-date on the back of earnings growth of more than 40 per cent.

Emerging markets present a similar opportunity at an even more compelling valuation. The MSCI Emerging Markets Index has gained nearly 20 per cent year-to-date, with earnings growth of nearly 40 per cent expected across 2026 and 2027.

Yet the index still trades at about 13 times forward earnings, against roughly 21 times for the S&P 500, and offers a dividend yield close to 3 per cent.

“We believe that under-allocation creates a potential tailwind for emerging market equities,” Dover said. “Even a modest shift in capital flows could meaningfully support returns.”

Globally, emerging markets remain Franklin Templeton’s top equity opportunity for the second half of 2026, alongside US small- and mid-cap stocks, value stocks, financials and core exposure to artificial intelligence (AI)-related themes.

The dollar’s quiet retreat

One of the year’s more significant surprises has been the US dollar. A major global energy shock would typically strengthen the dollar by improving US terms of trade. Instead, the currency has only firmed modestly.

“That tepid response suggests the era of broad dollar strength is likely over,” Dover said.

For investors with international exposure, the implications are meaningful. A weaker dollar typically supports returns in non-US markets and adds further momentum to the case for emerging markets.

Fixed income: income over duration

At the start of 2026, markets expected the Federal Reserve (Fed) to cut rates. Renewed inflation pressures, driven by higher global energy prices and their potential pass-through to transport, logistics and food, have reversed those expectations. Investors now price in the possibility of at least one Fed rate hike before year end.

The European Central Bank (ECB) and Bank of Japan (BoJ) have already moved in that direction, tightening policy and signalling further action if needed.

In this environment, Franklin Templeton favours short-duration yield. US high-yield bonds are particularly attractive, offering all-in yields above 6 per cent with minimal duration exposure.

Select emerging market debt, especially in Latin American markets such as Brazil, provides another compelling source of income.

Dover points to a structural shift in how investors should think about fixed income.

“Investors are confronting a period of bear flattening, in which shorter-term yields rise more rapidly than longer-term yields. While this environment presents challenges for duration-sensitive investors, it also creates attractive income opportunities, particularly in the short- and intermediate-maturity segments of government bond markets where nominal and real yields are compelling,” he said.

The world held. Now what?

The Franklin Templeton mid-year outlook is constructive without being complacent. Long-term themes including AI, defence, energy infrastructure and aging population dynamics continue to shape the investment landscape.

Private markets, including secondaries, private credit, real estate and infrastructure, also offer attractive opportunities.

The broader message is that the shocks of the past 18 months have not broken the world.

For investors prepared to look beyond familiar concentrations, that resilience is creating opportunity across more markets, sectors and asset classes than at any point in recent years.