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CONTRIBUTORS

Grant Bowers

Portfolio Manager,
Franklin Equity Group®
United States

Key takeaways:

  • The US economy could be approaching a Goldilocks equilibrium in 2026: growth that’s neither too hot or too cold, with inflation anchored and fiscal and monetary policy that is broadly supportive.
  • Productivity gains should underpin growth and drive returns: Artificial Intelligence (AI)adopters are positioned to lead the next leg of the market cycle, leveraging automation, advanced analytics and operational efficiency to unlock margin expansion and stronger profitability.
  • Valuation dispersion creates opportunity: The valuation gap between the top decile of the S&P 500 and the broader market remains near multidecade highs. This reflects recent market narrowness but also creates a compelling opportunity for active investors as leadership broadens.
     

The Goldilocks risk

The US economy could be approaching a Goldilocks equilibrium in 2026: growth that’s neither too hot nor too cold, with inflation anchored and a broadly supportive fiscal and monetary policy. Paired with AI-driven innovation fueling productivity across industries, our outlook for 2026 has a positive bias, as we see the upside scenario increasingly likely.

Despite our optimism, this outcome is far from certain. Elevated valuations in key growth segments leave little room for error, market leadership remains narrow, with recent market volatility reflecting uncertainty around AI adoption, earnings durability and policy timing. AI’s promise is undeniable, but its near-term impact on profitability and labor remains in flux. For growth investors, we see 2026 as a year where quality is poised to shine even in a volatile market. 

Why quality growth matters now

If the past few years were defined by navigating volatility, 2026 will be defined by a focus on quality and fundamentals. The fiscal and economic conditions appear to be aligning to support growth. We expect continued innovation-led expansion underpinned by quality fundamentals, an environment where we think disciplined, active management has the advantage.

For growth investors, this is the moment to lean into selectivity, focusing on franchises positioned at the intersection of secular tailwinds and operational discipline. Depth over breadth, fundamentals over narrative—this is how long-term compounders are built.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Past performance is not an indicator or a guarantee of future performance.

Equity securities are subject to price fluctuation and possible loss of principal.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the health care, information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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