Franklin Templeton Investment Solutions is keeping its equity overweight into August 2026, arguing that robust corporate earnings outweigh lingering inflation and geopolitical risks. The firm's latest outlook, released this week, points to consensus EPS growth forecasts above 20% for both global and U.S. equities over the next 12 months, with emerging markets expected to grow earnings by as much as 35%, according to IBES data as of July 13, 2026.
Earnings breadth has also improved significantly in the U.S., reducing the market's previous dependence on a handful of mega-cap technology names. That broadening, the firm says, supports a more durable rally. The macro backdrop is described as "broadly neutral": the Atlanta Fed's GDPNow model estimated annualized U.S. growth at 5.0% in late July, while unemployment held at 4.2%. Yet inflation remains the key complication—core PCE inflation ran at 3.3% in June, well above the Fed's 2% target, and the report suggests Fed Chair Warsh's approach adds uncertainty, with further tightening likely.
AI tilt persists despite July volatility
Even after a July shift toward a more style- and size-neutral U.S. equity stance, Franklin Templeton retains an artificial intelligence tilt, with overweight positions in the U.S., Japan, and emerging markets. The firm acknowledges that AI hardware trades saw profit-taking in July, but argues the adoption story remains intact and that less-crowded positions now offer better valuations. It flags AI commoditization as a risk: if broader-economy adopters stop demanding the latest hardware, capex could fall—good for hyperscalers but negative for semiconductor and hardware suppliers.
Regional divergences and bond views
Regionally, the firm stays underweight European equities despite improving growth indicators, citing energy price risk and the likelihood of a more hawkish ECB. Australia is the least favored market: the RBA has hiked twice since March 2026, restrictive policy has weakened domestic demand and housing, and fragile Chinese commodity demand compounds the pressure. With financials and materials making up 67% of the MSCI Australia Index, the firm is broadly bearish there.
On bonds, U.S. 10-year Treasury yields reached 4.74% as of July 31, prompting Franklin Templeton to trim its underweight. However, it sees greater value in international duration, arguing that weaker growth outside the U.S. makes market rate-hike expectations too aggressive. UK Gilts are a specific call-out, given fragile growth and a Bank of England rate already above neutral. Canadian government bonds were also upgraded as the Bank of Canada softens its hawkish tone.
Asset allocation and alternatives
At the asset-class level, equities are tilted optimistic, bonds near neutral, alternatives modestly bullish, and cash underweight—with the equity overweight funded by the cash underweight. The firm sees excess returns from equities as more attractive than credit, given strong earnings and tight spreads. Private assets and energy-linked alternatives receive structural support, as AI-driven demand offers long-term tailwinds for energy and industrial metals.
For advisors, the outlook reinforces the case for maintaining equity exposure, but also highlights the value of international diversification—a theme echoed in Franklin Templeton's Ting on global diversification. Meanwhile, the firm's platform moves, such as opening its Canvas tax platform to rivals, suggest a broader push to serve advisors. As always, investors should weigh these views against their own risk tolerance and goals.
