With high valuations suppressing long‑term return expectations and near‑term headlines driving sudden market moves, the increasingly volatile environment has made it harder for investors to filter out short-term noise, according to Franklin Templeton Investment Solutions.
Lisa Wang, head of EMEA investment strategy and goals based solutions at the firm, said: “Knee-jerk reactions are the worst types of decisions. As investors, it is important to have a consistent and repeatable investment process so, when things happen in markets, you can respond to it by using your existing process.”
To do this, Franklin Templeton produces its long-term capital market expectations (CMEs), which outlines its expectations for 10-year returns and volatility across asset classes and regions. This is reviewed annually and adjusted according to the existing environment.
Oliver Wallin, client portfolio manager at the firm, said: “Our starting point for any portfolio construction is: does the current environment challenge the long‑term understanding of how asset classes are expected to behave? There are periods – like the one we’re in now – where the 10‑year outlook is influenced by current conditions.”
As such, Franklin Templeton has entered 2026 with a neutral equity stance but clear regional tilts as it looks to keep portfolios aligned to long‑term goals and insulated from market noise.
Below, Wang and Wallin outline which regions and asset classes they favour most strongly this year – and where they believe investors should tread more carefully.
Bonds vs equities
According to Wallin, one of the key short-term concerns for investors is how much further markets can go when everything looks expensive.
Over 10 years, long-term return expectations for equities are slightly lower than average as high valuations reduce future performance.
As such, going into 2026 the firm has reduced its slight overweight to equities and brought it back to neutral.
“Equities nonetheless still have a compelling story: there’s still growth and a favourable inflation backdrop in specific areas,” he said.
“Currently that means a tilt toward emerging markets, a slight overweight to the US and an underweight to the UK and Europe.”
Meanwhile, the outlook for bonds is more favourable, according to Wallin.
“Bonds and equities have had a sustained period of higher correlation, reducing diversification benefits, but that is now normalising,” he said.
Wallin added that he prefers sovereign bonds over corporate debt in 2026, noting that corporate spreads aren’t offering attractive compensation for the risk, while sovereign bonds offer attractive diversification, “especially with more normalisation in places like Japan, and with the UK and Europe starting from more attractive yield levels”.
US and emerging markets
Despite ongoing debate regarding the US market’s dependence on a few mega-cap stocks and the artificial intelligence (AI) build-out – which may or may not be a bubble – Wang and Wallin said that the US remains an attractive market in 2026.
“A question we get a lot is: what’s our view on the US, tech, and concentration risk? Our response is that we don’t think we’re in bubble territory regarding AI,” said Wallin.
“It might be a boom, but we think the journey has a long way to go, so we are less concerned about maintaining a slight overweight to the US and less concerned about concentration risk or tech exposure.”
Wang acknowledged concerns that companies involved in the AI build out are spending too much on AI without much return on existing capital expenditure.
“However, if you look at how much was spent in 2025 it was around $400bn – which was far more than 2024 but it’s only about 1.3% of US GDP. At the peak of the dot-com bubble, spending was around 4.25% of US GDP,” she said.
“Even if [the hyperscalers] spent $700bn this year, they wouldn’t come near that. Free cashflow remains relatively low.”
Alongside the US, Wang said that many emerging markets look more attractive than developed markets.
“Fiscally, many of the developed markets when compared to emerging markets have a lot more debt – we do therefore have a bit more conviction in emerging markets”, she said.
Europe
Wallin said the investment framework considers growth, inflation and monetary/fiscal policy. As such, Europe does not look as attractive as other regions, prompting the decision to carry a slight underweight to the region in 2026.
“We see less growth potential and less favourable financial conditions in the UK and Europe than in the US and emerging markets,” said Wallin.
“Policy decisions matter too – for example, we think the Bank of England and the European Central Bank may need to do more in terms of policy than the current consensus expects, which influences our regional views.”