'Next year is a dull year for economic growth on the planet,' says Michael Browne
As financial markets and investments firms alike pause, reassess and gear up for 2026, investment experts at Franklin Templeton are sharing their outlook on where they see things heading.
From shifting yield curves to doubt in Canada-US trade relationships and a coming resurgence in mid-cap stocks, their views paint a picture of both optimism and caution for asset managers and institutional investors alike heading into the new year.
What stands out most to Michael Browne is the shift in the yield curve outlook. While Franklin Templeton’s Treasury forecast still sees 10-year yields in the 4 per cent to 4.5 per cent range, expectations for three rate cuts are setting the stage for a significant steepening. He argues this is critical because it signals a broader market recovery and potential rotation into small and mid-cap equities.
“From being a fairly flat yield curve to a steepening yield curve… that is a dramatic change from where we've been over the last two years… What that starts to do is suggest that there's already [a] majorly different tone within the markets,” said Browne, global investment strategist at Franklin Templeton, adding that a steeper curve typically reflects healthier market dynamics and wider leadership across sectors.
Meanwhile, Jeff Schulze, head of economic and market strategy at ClearBridge Investments believes small and mid-cap stocks could be in for a strong run, a segment that has lagged for years in what he described as a K-shaped economy, diverging outcomes not just for consumers, but for companies as well. He believes the setup for 2026 is finally aligning in their favour, driven by improving earnings momentum and supportive policy.
He also pointed to valuation as a key reason to watch this part of the market. Currently, the S&P 1000, which tracks small and mid-caps, trades at a steep discount to the S&P 500, nearly seven multiple turns below. Historically, these groups have traded at parity, and Schulze believes the gap is due for a correction.
“I think that 2026 is the year where the rubber hits the road, and small mid caps will do much better on a relative basis,” he said.
Globally, Browne expects economic growth to be sluggish, with most major regions - Europe, the US, and the UK - hovering around 1.5 per cent growth. India stands out as the exception, with growth projected at around 6 per cent.
“And I think that, for me, brings out that differential, which is that actually next year is a dull year for economic growth on the planet, it's about a dull year for inflation. The normal GDP growth is very exciting, but… there are pockets of much more aggressive growth that is going on at this particular moment in time, which have become undefined,” said Browne.
For Michael Greenberg, SVP and head of Americas portfolio management for Franklin Templeton Investment Solutions, the landscape for Canadian investors is shifting - politically, economically, and structurally. With a new federal government in place and a fiscal agenda focused on infrastructure and energy, he sees opportunity in maintaining some home-country bias.
“There's some merit to a home-wide incentive here as a diversifier to what's going on in some other markets,” he said.
Still, Greenberg believes that diversification beyond Canada and even beyond the US is becoming increasingly important. While Canada has long been tethered to its southern neighbour, he noted there’s now real potential to reduce that dependency as global trading partners are also more open to shifting supply chains.
“You have a willing person on the other side of the table that also is looking for reorienting supply chains outside of the US. So that’s good for Canada,” he said.
He continues to see the US as a core market that’s “still exceptional but maybe a little bit less so” but argues that non-US markets, supported by their own fiscal stimulus and more attractive valuations, may start to close the performance gap.
Yet, Schulze compared today’s US equity market to the late 1990s, describing it as an environment where volatility is likely to stay elevated. He expects sharp pullbacks, but also a strong tendency among investors to quickly step in and buy those dips. In his view, the market is being driven far more by earnings than by valuations, noting that S&P 500 returns in 2025 so far have not come from multiple expansion.
“Valuations are flat. It's all been a contribution from earnings delivery,” he said, adding that strong third-quarter results, including revenue surprises that exceeded long-term averages and generally positive guidance, reinforced this trend.
Looking ahead to 2026, Schulze expects a similar setup where continued earnings strength will push equities higher, but the ride won’t be smooth.
“It’s going to come at a higher volatility type of backdrop,” he said.
As for what Canada’s trade relationship with the United States could look like, Greenberg acknowledged the importance, describing it as a structural reality that isn’t going to change anytime soon, even amid political tensions or trade policy uncertainty. While there may be short-term volatility in cross-border relations, he underscored the US will remain Canada's largest trading partner for the foreseeable future.
That said, he sees growing momentum behind efforts to diversify Canada’s economic and trade partnerships. Recent energy agreements, diplomatic progress with other countries and current policy direction and global demand suggest Canada is finally gaining some traction on a diversification strategy that has struggled for decades. While he acknowledged Canada may not lead the next wave of AI innovation, he emphasized the country’s natural strength lies in its resource sector, particularly oil, natural gas, and critical minerals.
Both Greenberg and Schulze believe US equities should still be a core part of Canadian portfolios, given the unmatched innovation and tech leadership coming out of that market. However, Greenberg also pointed to relatively high valuations in the US and more compelling opportunities in international markets, noting that some non-US regions now have both the fiscal drive and valuation appeal needed to fuel a market re-rating.
“Most things look to have a really interesting rate of return,” said Browne. “Coming on the back of the year that we just had, I think it’s quite a challenging concept for investments at this point in time, but the world looks resilient.”
