Allocation views bubbles bifurcation case for staying invested

Allocation Views Bubbles, bifurcation and the case for staying invested Franklin Templeton Investment Solutions | September 2026

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Summary Our “risk-on” thesis remains intact heading into September, supported by resilient growth and strong corporate fundamentals despite geopolitical tensions, inflation pressures and uncertainty around artificial intelligence.

We favor diversified equity exposure, retaining a technology tilt while mitigating potential AI-bubble risks.

Inflation and policy remain key market concerns, but robust US and emerging market corporate earnings continue to support our equity positioning.

Elsewhere, we retain a preference for international government bonds amid rising expectations for tighter monetary policy.

Macro Themes Portfolio Themes Strong Growth Cross Asset: Risk-On • Macro growth remains strong, supported by strong • Corporate fundamentals remain strong amid double-digit corporate earnings power. earnings growth expectations for the next 12 months.

• The US economy has proven especially resilient; most • Macro growth remains constructive but is offset by estimates of US growth are above-trend. a complicated inflation and policy backdrop.

• Leading economic indicators look healthy, but we are • Sentiment and positioning have become more exuberant monitoring the impact of higher input costs and softening but are not yet at levels of concern. payroll data. Equity Diversification Complicated Inflation • Our equity exposure is tilted toward AI, reflected as • US inflation dynamics continue to be challenged by a overweight exposure to the US, EMs and Japan. prolonged period of elevated core inflation, although recent data has been more positive. • European macro and corporate fundamental indicators have improved. Earnings-per-share (EPS) growth forecasts • We expect limited second-order effects from the energy have strengthened amid rising corporate profitability. impulse, as supply-driven inflation will reduce real incomes and suppress consumer spending. • Australian equities remain our least preferred region due to a mixture of weak domestic growth, unsupportive fiscal • Core goods inflation has marginally improved. Tariff policies, and tight monetary policy. pressures have waned, but we are monitoring global supply chain tightness. Neutral Duration • We expect demand destruction to have a greater impact Tighter Monetary Policy on monetary policy decisions than market pricing • Heightened tensions in the Middle East have catalyzed a suggests, decreasing the chance that international central recalibration of policy expectations, with a tightening bias banks meet market hiking expectations. in all major regions including the United States. • Resilient US growth and elevated inflation complicate Fed • A more hawkish FOMC approach is now priced into policy. We maintain a relative preference for international markets, as Fed Chair Warsh focuses on reinforcing duration. credibility and independence. • Excess returns for equities appear more attractive than • Fiscal policy is supporting growth but contributing to credit, amid strong earnings and tight spreads. expanding deficits. Defense spending and energy support packages could also prove influential.