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In focus: AI bubble or sustainable growth?

Artificial intelligence (AI) remains a powerful growth theme particularly for major cloud services providers, as the latest industry evidence continues to show demand running ahead of supply and capacity being rapidly utilized.

With that in mind, we believe the risk of a potential bubble in AI stocks is limited at this point. However, growth is uneven across the value chain, necessitating a bottom-up stock selection process that also considers evolving technologies and supply constraints.

Investment outlook

Third-quarter earnings results in the United States have been robust and we believe corporate America is in good shape, benefitting from probable further Federal Reserve (Fed) rate cuts. The earnings outlook may brighten for small-capitalization stocks, industrials and financials, helping to broaden market performance. Further earnings recovery is also expected in Asia Pacific, but potential dispersions necessitate a selective approach. That means staying nimble with risk/reward adjustments even as we maintain conviction on technology stocks. In Japan, we prefer stocks with structural growth and corporate reform exposures. European equities approach the close of 2025 with a constructive backdrop and still-favorable valuations. Financial services remain a core source of potential upside. In other favorable sectors, capital goods enjoy structural support from electrification and infrastructure stimulus, while luxury may present catch-up potential as organic demand recovers.

In North America, companies have been delivering record margins with healthy results across the market. Third-quarter earnings results were very strong, with roughly two-thirds of companies beating revenue forecasts, and, overall, companies delivering record margins. All 11 sectors had healthy results, indicating a broadening of earnings participation that we had been anticipating. We believe corporate America is in good shape right now, and the environment looks distinctly non-recessionary.  

In Asia Pacific, as of the end of November, about 85% of companies in the Asia ex-Japan region have reported their latest quarterly results. Within this group, 40% delivered positive earnings surprises, which is slightly above historical seasonality.1 Overall, signs continue to point to an ongoing earnings recovery in the Asia ex-Japan region, with various forward estimates putting the 2026 earnings expansion at a roughly high-teen percentage level. A low-teen level of earnings growth is also expected for Japan in 2026, similarly a recovery from 2025.     

In Europe, equities approach the close of 2025 with a more constructive backdrop than in recent years. The market delivered solid gains, especially in the first half, supported by US dollar weakness and a policy pivot toward fiscal stimulus, notably measures aimed at defense and infrastructure. That policy impulse helped drive early-year outperformance, yet over the full year Europe did not keep pace with larger gains in parts of Asia where technology-led leadership was particularly strong.

Market review: November 2025

Global equities were mixed in November, with the MSCI All Country World Index (ACWI) benchmark declining in US dollar terms as the information technology, consumer discretionary and industrials sectors dragged. In contrast, the health care sector led amid a rotation from higher-beta exposures to defensives. Growth stocks lagged value stocks, while large caps modestly underperformed small caps.

During the month, US stocks were notably pressured by a sharp momentum unwind and fading AI enthusiasm. Sector performance skewed toward defensives despite increasingly dovish Fed rhetoric. European equities outperformed amid constructive macroeconomic signals, although fiscal developments in the United Kingdom drew attention and pushed gilt yields higher. Asian stocks underperformed as Korea and Taiwan tracked global semiconductor swings. Japan, however, remained relatively resilient.

Endnote

  1. Source: Goldman Sachs Portfolio Strategy Research, “Asia-Pacific Weekly Kickstart.” As of November 29, 2025. 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.

 

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Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.

Active management does not ensure gains or protect against market declines.

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. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.

Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

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.

Diversification does not guarantee a profit or protect against a loss.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

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