Allocaton views risk on rates up

Allocation Views Risk on, Rates up: Positioning for growth, yield and diversification Franklin Templeton Investment Solutions | October 2026

Not FDIC Insured No Bank Guarantee May Lose Value

Summary We currently see heightened volatility in fixed income markets as higher energy prices and resilient growth push up bond yields. This has pressured equity valuations and resulted in an increasingly positive correlation between stocks and bonds, while also highlighting the importance of additional diversifiers within investment portfolios. In this month’s edition of Allocation Views, we explore how consistently strong economic growth and corporate earnings demand a positive attitude toward risk, even in the face of uncertainties such as geopolitics, persistent inflation and monetary policy tightening. As our constructive view on equities holds firm, we also see increasing value in government bonds as markets price in multiple interest-rate rises, pushing yields to attractive levels.

Macro Themes Portfolio Themes Strong Growth Cross Asset: Risk-On • Macro growth remains strong, supported by robust • 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. Estimates • Macro growth remains constructive but is offset by of US growth are above trend, while the labor market a complicated inflation and policy backdrop. appears stable. • Sentiment and positioning are becoming more exuberant • Leading economic indicators look healthy and business but, in our view, are not yet at levels of concern. activity has improved, but we are monitoring the impact of higher rates and input costs. Equity Diversification • Our equity exposure is tilted toward artificial intelligence Complicated Inflation (AI), reflected in overweight exposure to the United States, • The US inflation picture remains challenged by emerging markets (EMs) and Japan. a prolonged period of elevated core readings, despite improvement in recent data. • Optimism around US earnings breadth is confined to large-cap stocks, as higher interest rates • We expect limited second-order effects from the energy disproportionately affect small-cap earnings. impulse, as supply-driven inflation reduces real incomes and suppresses 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. Value in Duration • We expect higher energy prices to create more demand Tighter Monetary Policy destruction than market pricing suggests, decreasing the • Heightened tensions in the Middle East have catalyzed chance that major central banks meet market hiking a recalibration of policy expectations, with a tightening expectations. bias in all major regions, including the United States. • We upgrade our view of US Treasuries as markets have • The market now expects a more hawkish Federal Open appropriately priced in the US reflationary macro Market Committee (FOMC) as Federal Reserve (Fed) backdrop. Chair Kevin Warsh focuses on reinforcing the central bank’s credibility. • Excess returns for equities appear more attractive than those for credit, amid strong earnings and tight spreads. • US midterm elections should have little impact on fiscal policy or bond yields, although debates on budgets and the debt ceiling may cause some volatility in bond markets.