A volatile mix of policy shocks and technological optimism is shaping Franklin Templeton’s outlook for the US in 2026. Changes in tariff policy have unsettled trade assumptions, stagflation concerns have lingered, and a prolonged government shutdown has complicated the economic read by disrupting access to key data. At the same time, enthusiasm around generative artificial intelligence has lifted market sentiment and amplified debates about the pace and limits of near-term delivery.
“Uncertainty and volatility, in short,” says Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.
Despite the noise, Desai’s baseline remains constructive on US activity. She sees several supports for growth: resilient household demand, an early-year fiscal tailwind, easier monetary conditions and a continuation of the AI-related investment boom. Desai cites Brookings estimates that point to fiscal stimulus worth well above one percentage point of GDP growth, implying a meaningful boost to demand momentum in the first part of the year. “I maintain a constructive outlook for US growth,” Desai says.
That outlook is tempered by signs that parts of the economy are cooling at the margin. The unemployment rate has edged up from still-low levels, hiring appetite appears cautious, and the quality of labour-market data has become less reliable, complicating assessments of how much slack is emerging. Outside of AI, business investment may remain hesitant even with incentives designed to accelerate capital spending decisions, suggesting an uneven capex picture.
Inflation is the more persistent challenge in Desai’s framework. She sees the balance of stagflation risk tilted toward inflation pressures early in 2026, when fiscal support could add spending power and potentially keep demand firm. In that scenario, inflation could push back toward the mid-3% to 4% range, high enough to pressure real incomes if wage growth does not keep pace, and to slow consumption later in the year. “Conversely, I still do not see the conditions for inflation to come back to 2%,” Desai says.
The policy backdrop adds a structural dimension to that inflation view. Desai argues the Fed’s cumulative 175-basis-point easing, taking the fed funds rate to 3.50%–3.75%, has reduced restraint, and that renewed balance-sheet expansion through short-term Treasury purchases risks reinforcing fiscal dominance. In her assessment, sustained deficits combined with central bank support complicate the disinflation path and keep markets sensitive to incoming inflation and labour data.
See also: Earnings, rates and AI spending could drive returns: Klay Group
Fixed income
For fixed income investors, Desai expects macro forces to matter more than they did during the ultra-low-rate era. She highlights that the 10-year Treasury yield is higher than it was in August 2024 (before the Fed began cutting) while core PCE inflation is broadly unchanged over that period. In her view, the steepening yield curve reflects both confidence in growth resilience and concern about fiscal pressures and inflation persistence.
“For financial markets, macro is back in the driver’s seat in a way we haven’t seen in some time — Zero Interest Rate Policy is a fond distant memory, carry has its due,” Desai says.
See also: 26 for ‘26: RHB picks 24 Singapore stocks; identifies another two that meet investment criteria
This sets up a rate environment that may remain rangebound but volatile. Desai expects long-term yields to react to changing perceptions of labour market slack, fiscal impulse and inflation stickiness, producing what she has described as a moderate “roller-coaster” pattern. With risks skewed modestly toward higher long-end yields, Franklin Templeton’s fixed income stance emphasises flexibility over heavy duration exposure.
“I think the Fed will be cautious on additional easing — especially if fiscal tailwinds keep inflation sticky — so duration looks unattractive and investors would be wise to stay nimble while harvesting today’s fairly attractive yields,” Desai says.
Credit conditions, in Desai’s baseline, do not point to an imminent default cycle given a constructive, if uneven, growth outlook. However, she sees limited scope for spreads to tighten further because valuations are already rich and supply has been heavy. In that context, the income component of returns may do more work than spread compression, and security selection becomes more important than broad beta.
Currency and diversification are also part of Franklin Templeton’s fixed income framework. Even after depreciation in 2025, Desai considers the US dollar historically strong, making global and emerging market diversification more relevant as investors seek broader sources of yield and return. A more multipolar geopolitical order, along with diverging growth and policy paths across major economies, strengthens the case for looking beyond a US-only opportunity set.
Equities
Franklin Templeton’s equity outlook for 2026 begins with a reminder that sentiment can swing sharply even in strong years. Shep Perkins, chief investment officer, points to early April 2025, when tariff-policy communications contributed to the market’s steepest one-day drop since 2020 and pulled the S&P 500 close to a 20% decline from its February peak, followed by a rapid reversal by month-end. In Perkins’ view, that episode illustrates how quickly risk perception can overtake fundamentals, and how quickly markets can reprice when conditions stabilise.
“The concerns are all reasonable and not to be overlooked, but focusing on these issues alone underplays the forces that have driven the market upward, and how these drivers could push the market even higher in the year ahead,” Perkins says.
For more stories about where money flows, click here for Capital Section
Perkins argues that 2025 surprised to the upside not only through headline index gains but through broader participation. Corporate earnings growth exceeded expectations, and AI strengthened as a driver of sentiment and investment beyond technology, widening the set of potential beneficiaries. For 2026, he highlights a mix of supportive “what could go right” factors: easing global financial conditions amid synchronised rate cuts, a banking system characterised by strong capital ratios and relatively low delinquencies, and inflation trends that have remained contained despite tariffs.
AI remains the central upside narrative. Perkins emphasises the scale of planned investment, citing US$500 billion from hyperscalers alone, and the knock-on cycle in electricity generation and transmission. He expects AI to continue creating new subsets of winners and new use cases, with the added possibility of tangible productivity gains beginning to show up more clearly in economic and earnings data.
“A lot can go right, but the ride may not be smooth,” Perkins says.
Valuations are the key constraint and the main source of potential volatility. Perkins notes the S&P 500’s forward price/earnings multiple sits in the highest historical quintile, driven heavily by the valuations of mega-cap growth stocks. He argues, however, that several of these large-cap leaders trade in line with or below their own historical averages, while the rest of the index has repriced higher versus its longer-term norms, suggesting different valuation pressures within the market.
Perkins expects higher volatility to accompany elevated multiples and large AI investments whose long-term payoff paths remain uncertain. He draws perspective from the mid- to late-1990s, when volatility was higher than in the past decade but the market still advanced over time. In his framework, a combination of strong earnings growth and a still-high multiple could keep equities moving higher through 2026, albeit with sharper swings and more frequent rotations across sectors and styles.
“Empirically, when market multiples are higher, they are usually accompanied by a higher standard deviation of returns,” Perkins says.
