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In our recent publications, “From US technology leadership to US small caps and emerging markets,” (January 2026) and “Get ready for a broader US market,” (January 2025) we highlighted a setup that is rare but powerful: strong economic growth, broad earnings participation and unusually high market concentration.
Historically, this combination creates fertile ground for market broadening — away from a narrow group of leaders and toward international equities, small-capitalization stocks and less-favored sectors within the United States.
This process was quietly underway through most of 2025 and became more dynamic in recent months. We believe this global rotational bull market can persist over the coming years. However, markets rarely move in straight lines. Even in healthy bull markets, higher volatility and periodic pullbacks are normal — and often create the best opportunities to add risk at more attractive prices.
From a strategic perspective, we view the current environment through the lens of two plausible market paths: Map A and Map B. These are not competing forecasts. They are two components of the same investment framework.
Map A reflects the environment markets are currently pricing. It assumes:
Under this scenario, market leadership has continued to broaden, volatility has remained contained, and a constructive macro and liquidity backdrop has supported risk assets. This framework helps explain why markets have remained resilient despite recurring policy uncertainty and ongoing geopolitical risks. Notably, several major US indexes have reached new all-time highs this year, with the S&P 500 Equal Weight Index and value stocks leading the advance.
Map B reflects a different — but historically common — path. It assumes that an unexpected shock could force markets to reassess one or more assumptions embedded in Map A.
Such shocks can include:
When these events occur, volatility typically rises abruptly, not gradually. Correlations increase, diversification becomes less effective in the short term, and markets reprice risk faster than fundamentals alone would justify.
Episodes such as the December 2018 Federal Reserve interest-rate tightening scare, the COVID-19 pandemic shock and sharp, event-driven selloffs in recent years illustrate this dynamic, which is characterized by sudden drawdowns driven by uncertainty rather than economic collapse. Then, recoveries followed once stability returned.
The key challenge for investors is rarely predicting the shock itself. It is being positioned to withstand the initial repricing without events forcing the need to act at precisely the wrong time.
We remain constructive on US and global equities over the long term. We believe the global rotational bull market remains intact, supported by solid fundamentals and broadening participation.
At the same time, elevated valuations, crowded sentiment and midterm cycle dynamics point to a higher likelihood of volatility. Rather than undermining the investment case, this environment reinforces the importance of preparation and disciplined portfolio management.
The objective is not to forecast the timing of the next drawdown, but to ensure portfolios retain the flexibility to respond constructively — by rebalancing, selectively adding exposure and improving long-term outcomes when market conditions become less favorable.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
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.
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.
Large-capitalization stocks 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.
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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.
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