CONTRIBUTORS
Chris Galipeau
Head Market Strategist
Franklin Templeton Institute
Lukasz Kalwak, CFA
Market Strategist
Franklin Templeton Institute
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
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