Elevated volatility in individual stocks and a surge in debt issuance by major artificial intelligence (AI) spenders are creating fresh income opportunities across equities and investment-grade credit, according to Franklin Income Investors.
Ed Perks, chief investment officer of Franklin Income Investors, said headline equity-market volatility remains relatively subdued, but this masks considerably higher volatility at the individual-stock level.
In the current low-correlation environment, individual stocks are increasingly moving independently of one another, causing their movements to offset at the broader index level even as single-stock implied volatility remains elevated.
Sector rotation and company-specific catalysts are contributing to this dispersion, with corporate earnings becoming particularly important as investors seek evidence that significant AI investments are beginning to translate into stronger revenue growth and improved returns.
Franklin Income Investors sees this environment as potentially attractive for equity-linked notes (ELNs), which can provide additional income opportunities, potential capital appreciation and selective exposure to market themes including AI.
ELNs, however, are structured investments whose returns and potential losses depend on the performance of their underlying equities and the specific terms of the notes.
At the same time, Franklin Income Investors sees a separate opportunity developing within the investment-grade (IG) credit market as the AI investment cycle reshapes corporate debt financing.
Rapid expansion in AI-related capital expenditure by hyperscalers including Alphabet, Meta, Microsoft, Amazon and Oracle has contributed to a significant increase in corporate debt issuance, including longer-maturity bonds.
The heavy supply has at times outpaced investor demand, pushing credit spreads wider and requiring issuers to offer higher coupons to attract buyers.
Franklin Income Investors believes this has created selective dislocations in investment-grade credit, potentially allowing income investors to gain exposure to financially strong technology companies at more attractive yields.
Data cited by Franklin Income Investors showed US dollar debt issuance among major hyperscalers surged to US$157 billion in 2026 year-to-date, up sharply from US$93.3 billion for the whole of 2025.
This compares with US$20.1 billion in 2024, US$17.2 billion in 2023, US$47.9 billion in 2022 and US$41.7 billion in 2021.
The sharp acceleration reflects the substantial financing requirements associated with AI infrastructure investment as technology companies pour capital into data centres, computing infrastructure and other capacity required to support AI development.
Franklin Income Investors believes the resulting repricing in parts of the hyperscaler bond market appears to be driven more by technical factors, particularly increased bond supply, than by a material deterioration in underlying credit fundamentals.
Its focus remains on investment-grade hyperscalers that continue to possess strong balance sheets, high credit ratings and significant cash-generation capacity.
Parts of these companies’ longer-dated bond curves are now trading at spreads more typically associated with lower-rated credit. In some areas, investment-grade yields have moved closer to high-yield levels despite what Franklin Income Investors views as materially different underlying credit risks.
The investment manager sees the dislocation as an opportunity for income investors to add higher-quality bonds at more attractive prices.
While shorter-dated hyperscaler bonds remain relatively tightly priced, longer-dated securities offer more meaningful yields, carry and spreads.
This potentially allows investors to purchase high-quality credit at lower prices and lock in higher coupons, using supply-driven market dislocations to increase portfolio income without necessarily assuming materially greater fundamental credit risk.
Franklin Income Investors said the combination of elevated single-stock volatility and selective dislocations in investment-grade credit underscores the importance of diversification across asset classes, sectors and individual securities.
A flexible approach, it said, can allow investors to draw on multiple sources of income as market conditions evolve, while remaining selective about risk and retaining exposure to longer-term growth opportunities such as AI.
