Executive Summary
Our broadening thesis did not begin in 2026—it began more than 18 months ago.
In January 2025, we published “Get ready for a broader US equity market,” arguing that the extraordinary concentration in US mega-cap technology stocks was unlikely to persist indefi-nitely. While the Magnificent Seven1 had become the dominant driver of market returns, we believed improving fundamentals across a much broader set of companies, sectors and regions would eventually support a healthier and more diversified bull market.
One year later, in January 2026, we expanded on that framework in “Broadening momentum: From US technology leadership to US small-caps and emerging markets,” moving from the broad idea of improving market breadth to identifying where we believed leadership would emerge: US small-caps, equal-weighted equities and emerging markets.
The past 18 months have largely validated that view. Rather than continuing to rely on an increas-ingly narrow group of mega-cap technology stocks, investors have been rewarded across a much wider opportunity set. Leadership has broadened across market capitalizations, invest-ment styles and global equity markets, with the MSCI Emerging Markets (EM) Index returning 62%, Russell 1000 Value Index 40% and Russell 2000 Value 39%, all comfortably outperforming the Magnificent Seven (25%) over the same period.
Today, however, investors face a different challenge. The broadening bull market remains intact, but after a powerful recovery from the March lows, markets are entering a more demanding phase. Earnings continue to provide strong support, yet liquidity2 is becoming less accommodative, market leadership is becoming increasingly selective and volatility is likely to increase.
In our latest paper, we discuss the following:
- The broadening we expected has arrived
- Earnings became the engine
- Stock prices follow earnings over the long run
- AI has become an economic story
- The next phase will require more discipline
- Midterm election years: Volatile, but potentially opportunity-rich
See more: From US Concentration to Global Opportunity—Staying Invested While Preparing for Volatility
Conclusion
The broadening bull market remains intact, in our view. Earnings continue to provide fundamental support, and global participation remains exceptionally strong. But after a powerful advance, we think the combination of higher valuations in parts of the market, tighter monetary conditions and increasing market dispersion argue for greater discipline.
This is a call to maintain discipline. Stay invested, diversified, and, if history is any guide, buy the pullback.
The next phase of the bull market is unlikely to reward concentration in a handful of expensive momentum stocks. Instead, we believe it is likely to favor investors who remain globally diversified, focus on earnings quality and maintain the flexibility to take advantage of the opportunities that periods of higher volatility inevitably create.
Stay invested. Stay diversified. Be ready.
Endnotes
- Magnificent Seven refers to shares of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.
- Global liquidity is proxied by the aggregate monetary policy stance of major central banks, measured as the number of central banks easing versus tightening monetary policy.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.
Diversification does not guarantee a profit or protect against a loss.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The investment style may become out of favor, which may have a negative impact on performance.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
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.
WF: 11885758
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.
You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
© Franklin Templeton
More Capital Growth Topics >
