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As 2025 draws to a close, it is time to turn our attention to 2026 and beyond. In what follows, we highlight our top investment ideas, both for the coming year and over the longer run. Over the next few weeks, we encapsulate our 2026 (cyclical) and our long-term (secular) investment analysis into two separate categories of three themes each.
For 2026, our cyclical themes are: Broadening, Steepening and Weakening.
As we elaborate below, our cyclical themes intersect—akin to Venn-diagrams— with reinforcing implications across investor portfolios. We first consider the short-term outlook for 2026.
US outperformance has dominated investment returns in recent years—colloquially referred to as US exceptionalism. Since the global financial crisis (2008-2009), risk-adjusted US equity and fixed income returns have trounced those of other countries and regions.
Make no mistake about it: The United States remains a magnet for global investment flows. Its corporate and market fundamentals remain superb. The US boasts superior profitability, liquidity and a breadth of investment options—which we believe are unmatched anywhere.
But in important ways, the global investment landscape is evolving. Changes are primarily about new opportunities, based on improving profitability and more attractive valuations in sectors and regions that so far have underperformed. Support also comes from expected monetary policy easing globally.
Within the US equity market, the earnings outlook has brightened for small-capitalization stocks, industrials and financials. Small-cap stocks and industrials, which are typically more highly leveraged than the rest of the market, will see profitability rise as the Federal Reserve (Fed) trims interest rates and debt servicing costs fall. Financials should benefit from a steeper yield curve, improving net interest margin and from innovations in capital markets.
The implication is that U.S. equity market performance can broaden sustainably away from the still-compelling leadership of large-capitalization growth, technology and artificial intelligence (AI) companies.
Similarly, prospects appear to be brightening outside the United States. Over the next 12 months, earnings growth is expected to be as high in emerging markets as in the United States. That outcome owes much to the macroeconomic growth impulse delivered by monetary easing across the emerging complex. Even Europe may participate, nudged ahead by both monetary and fiscal easing, paving the way for an upturn in the European growth and earnings cycles in 2026.
Policy stimulus outside the United States is a welcome offset to the drag induced on world trade via U.S. tariffs. A cyclical upturn outside the United States also creates diversification opportunities, as accelerating economic and earnings growth in emerging economies and Europe contrasts with a potential U.S. “soft patch.”
Our broadening thesis extends beyond equities. Alongside various emerging central banks and major global central banks, the Fed has resumed its easing cycle. As U.S. short-term interest rates fall, investors will be confronted with rollover risk in their money market holdings. Accordingly, we anticipate that many will shift from cash into fixed income (public as well as private) with exposure to duration or credit returns.
A key beneficiary will be emerging market (EM) debt, sovereign and corporate, local as well as hard currency denominated. For U.S. investors, a weakening of the dollar adds to the appeal of emerging local currency securities. But as the Fed cuts U.S. rates, investors from other regions (e.g., Europe, the United Kingdom, or Japan) will see the cost of currency hedging decline, which would increase their net (of hedging) returns in emerging fixed income assets.
Moreover, an appreciation of emerging currencies against a weakening U.S. dollar lowers import prices and hence overall inflation, allowing emerging central banks to ease further next year. That outcome would underpin EM bond prices. Accordingly, even after a year of stellar returns, emerging debt markets are poised to deliver again in 2026.
Next time: The implications of steepening yield curves.
Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
Lawrence Hatheway is Global Investment Strategist – Franklin Templeton Institute.
Excerpted from Global Investment Outlook: 2026 and Beyond, Franklin Templeton Institute, originally published on the Franklin Templeton website, Nov. 17, 2025.
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Content copyright © 2025 by Franklin Templeton. All rights reserved. Used with permission.
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