The following commentary is contributed by Franklin Templeton’s Chief Investment Officer (Income Investors) Ed Perks
Investors entering the second half of 2026 (2H26) should resist the temptation to chase momentum and instead prioritise income, quality and flexibility as geopolitical shocks, policy uncertainty and artificial intelligence spending reshape markets.
The US-Iran conflict drove an energy shock in 1H26, reignited inflationary pressure and pushed central banks towards a more hawkish stance. Reduced forward guidance from the US Federal Reserve could now make risk assets more sensitive to incoming data and policy signals.
In fixed income, yields remain attractive by historical standards, but tight credit spreads offer little margin for error. The stronger approach is therefore to focus on carry and income rather than rely on broad capital gains, while maintaining relatively short duration and carefully selecting higher-quality securities.
Equities remain on constructive footing, supported by earnings growth and broader market participation. Yet parts of the market appear fully valued, making selectivity increasingly important.
Artificial intelligence (AI) remains a powerful investment theme, but opportunities are not confined to technology and semiconductors. Utilities, financials and energy could benefit as the AI investment cycle spreads across the economy, although markets will need evidence that earnings strength is broadening beyond today’s dominant leaders.
Volatility should also be viewed as an opportunity rather than merely a threat. Market dislocations triggered by geopolitical events can create attractive entry points, while elevated implied volatility may improve income and participation terms for certain structured investments.
The biggest risk is the scale of AI-related capital expenditure. Data centres and major infrastructure projects are competing for financing and resources, raising the prospect of bottlenecks, delays and market volatility should spending plans weaken.
The message for 2H26 is clear: Remain patient, diversified and ready to move. In a market shaped by range-bound rates, policy uncertainty and heavy capital demands, durable cash flows and disciplined allocation should matter more than following the latest rally.
