Franklin Templeton's investment managers aren't buying the recession story. They expect stocks to keep climbing, earnings to remain strong and economic growth to broaden well beyond the mega-cap technology stocks that have powered the market.
But they also see a potentially uncomfortable companion to that growth: higher long-term interest rates.
"We're very positive on the outlook for the economy," Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, told Financial Advisor magazine. "We think the market's going to be up more in a year than it is now, broadly."
Franklin Templeton's latest Global Investment Management Survey of roughly 200 investment professionals forecasts 2.5% U.S. GDP growth with no recession in 2026. Managers see the S&P 500 ending the year between 7,400 and 7,800, supported by earnings growth exceeding 15%.
But Dover said investors shouldn't mistake that bullishness for a recommendation to pile further into the AI trade.
"We're positive on the AI story," Dover said. "That said, we think you should diversify broader than that."
In fact, he said, many investors may already have considerably more AI exposure than they realize.
"What we have found is that many people are more overweight on the AI trade than they think they are," Dover said. Advisors can help clients build "a more diversified and less risky portfolio."
Franklin sees opportunities in U.S. mid- and small-cap stocks, Japan and emerging markets. One of the strongest signals that market gains are finally broadening is earnings growth among smaller companies, Dover said.
"The strongest signal is the very broad earnings growth, especially with small caps," he said, adding that smaller companies may also have considerable historical catching up to do.
Asked which sector Franklin's top equity strategist would own for the next five years, Dover had a less fashionable answer: industrials.
That optimism doesn't extend to falling long-term interest rates.
"We think that long-term real interest rates are likely to be higher in the future because of prolific spending by governments all around the world," Dover said. "That's a huge problem in Europe, certainly Japan, and in the United States."
That could complicate Treasury Secretary Scott Bessent's efforts to push down long-term borrowing costs through increased Treasury bond buybacks.
Dover cautioned against attributing the recent rise in long yields to any single factor. U.S. deficits matter, he said, but so do foreign demand for Treasurys, Japan's fiscal pressures and the possibility that AI-driven productivity ultimately produces stronger U.S. economic growth—and higher rates.
"The Fed sets the overnight rate. The market sets the 30-year," Dover said.
For advisors, that argues against waiting indefinitely in cash for rates to fall.
Dover recommends clients consider moving excess cash into shorter-duration fixed income, with Franklin preferring shorter-duration corporate bonds. The firm is also bullish on municipal bonds, particularly for wealthy investors.
Munis can provide both attractive after-tax income and lower correlation with stocks and Treasuries, Dover said.
"There's no free lunch," he said. "But that's about as close as you get. It's not a big free lunch. It's maybe an extra pickle."
Franklin also sees a stronger case for active management in bonds than stocks. Dover said a majority of active fixed-income managers can outperform their benchmarks, making core and core-plus portfolios particularly attractive as rate volatility increases.
For wealthier clients looking beyond public markets, Dover singled out private-equity secondaries. which buy and sell existing commitments or stakes in private equity funds, providing liquidity to sellers and immediate exposure to mature portfolios for buyers.
Because companies remain private longer, investors risk missing growth once captured in public markets. Secondaries allow investors to enter private investments mid-cycle, diversify vintage risk and, in today's market, potentially buy assets at discounts of 20% to 30%.
"That's a very sweet spot," Dover said. "That's a place that we would argue makes an awful lot of sense for wealthier investors."
Taken together, Dover's message to advisors is less about abandoning this bull market than changing what's powering client portfolios.
The economy can keep growing. Stocks can keep rising. AI can continue winning. But investors just don't have to make the same bet three times, he argued.