Steady With Moderate Volatility

Equities

• We are constructive on US equites and have established a target range of 7,000 to 7,400 for the S&P 500 Index, as expected earnings-per-share growth of 8%‒13% y/y (based on our Global Investment Management Survey) should drive stock prices higher.
• As you may have read in our previous updates, we have been on the “broader market” train since January of 2025 (see “Get ready for a broader US equity market”). Our operating thesis from that research is playing out largely as we expected. Consider this: from December 31, 2024 through the close of February 19, 2026, the Russell 1000 Value Index was up 23.42%, the Russell 2000 Index was up 21.28%, the S&P 500 Index was up 18.32%, the S&P Equal Weight Index (which we see as the best proxy for the average stock) was up 18.13%, the Magnificent Seven (Mag 7) basket (the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) was up 16.77%, the S&P MidCap 400 was up 16.71%, and the Russell 1000 Growth Index was up 12.93%. Would you have guessed that large cap growth is the laggard over the last 14 months? That, my friends, is broad participation, and that is bullish.
• Regarding year-to-date (YTD) performance, I offer this: Through the close of February 19, the S&P Equal Weight Index (again, the average stock) was up 6.04%. Within the S&P 500, 343 stocks, or 68% of the index, have positive YTD gains. On a percentage basis, 41% of S&P 500 stocks were up more than 10% YTD. Yet the Mag 7 names are down 6.51% YTD. (These statistics are courtesy of Lukasz Kalwak of Franklin Templeton Institute). Speaking of the Mag 7, Nvidia reports earnings February 25, which will be important to watch.
• We think there are a few drivers of this broad participation in market gains. First, earnings power is broader at the index and sector levels than it has been in five years (source: Franklin Templeton Institute, based on FactSet data as of November 12, 2025). Second, based on our conversations with financial intermediaries, investors appear to be heavily concentrated in large-cap growth names. Third, many investors appear to be underexposed to the broad tape, specifically to mid- and small-cap space, based on what I generally hear in our interaction with intermediaries.
• We reiterate our bullish stance on emerging market (EM) equities. This call is not currency driven; remember, we are expecting the dollar to be flat in 2026. Rather, this call is driven by earnings power: Our research suggests EMs have the strongest forward, two-year cumulative earnings power on the planet. We would ask the question, “Do you have appropriate exposure to EMs?”
• AI disruption is happening. The software sector has been ground zero, but the volatility has spread to the financial, real estate and logistics industries in the last few days. We think it will continue to spread. Here is the issue: Long-standing business models are being tested. Software is a good example where, for years, you could count on subscription-based models to generate consistent cash flow streams. As a result, higher multiples were awarded to the space. Now, it’s possible AI could disrupt that scenario and, as a result, terminal values are being questioned. This will take time to play out, and the key is separating the winning business models from those in the crosshairs of disruption. This is not the AI bubble bursting; this is AI disruption. Read our Institute view here: “Quick Thoughts: At the knee of the curve of disruption.”
• Do your homework. Stocks have followed earnings over time.
• We reiterate our belief that it is time for a diversified equity playbook that includes large-, mid-, and small-cap exposure in the United States with a balance of growth and value. The same can be said for your ex-US equity exposure; we believe it’s a good time to consider exposure to emerging markets and developed international markets. Our conclusion: We think it is prudent to reduce concentration and spread exposures.

Fixed income

• We expect the US Treasury 10-year bond yield to trade in the range of 4.0% to 4.25% this year. Bond yields are currently at the lower end of that range, at 4.07%. The two-year Treasury yield has been range-bound for the last few months as well, most recently trading near 3.46%. The US yield curve has flattened recently, with the two-year-to-10-year spread at 59 basis points (bps), down from 73 bps about a week ago. We expect more bull steepening in 2026.
• We are forecasting short-duration fixed income mandates and corporate credit to outperform cash in 2026, as they did in 2025. Considering our views on US 10-year yields, we do not expect duration to be a significant driver of total return this year. Rather, all-in yield capture seems to be the play.
• Despite fears of a looming credit crisis, we see little evidence of that in corporate bond spreads. Investment-grade (IG) spreads (one-year to three-year option-adjusted spreads, or OAS) are 48 bps over Treasuries, flat on the week. High-yield (HY) spreads (as proxied by the Bloomberg US Corporate High Yield Index OAS) are 272 bps over, down three ticks on the week. Both measures are very close to five-year tights. Corporate fundamentals appear healthy. Significant spread compression from here seems unlikely, both in IG and HY space.
• We are bullish on municipal bonds this year and find taxable-equivalent yields to be attractive along with robust fundamentals. Importantly, the increased supply in the marketplace has run its course for now, and muni bonds have been performing well since last August. We think this should continue.

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey dropped to 35%, down four ticks from last week’s reading. The percentage of bearish investors in the AAII survey is 37%, down two ticks from last week’s reading.
• Neither of these readings are at extremes, but sentiment is growing more cautious. Remember, this is a contrary indicator.

We will continue to analyze the markets and will offer insights again next week.

Source of data (except where noted) is Bloomberg as of February 20, 2026. There is no assurance that any forecast, projection or estimate will be realized. An investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance. Important data provider notices and terms available at www.franklintempletondatasources.com.

The Franklin Templeton Institute Global Investment Management Survey is a biannual outlook survey designed to give a view across our investment teams. The Franklin Templeton Institute identifies the median across the survey answers and develops the outlook. The survey received responses from around 200 portfolio managers, directors of research and chief investment officers, representing participation across equity, private equity, fixed income, private debt, real estate, digital assets, hedge funds and secondary private markets. Each of our investment teams is independent and has its own views.

Endnotes:

1. Source: Walmart Inc. Q4 2026 earnings call transcript. Insider Monkey Transcripts and msn.com. February 19, 2026.

2. Source: Walmart Inc. Q4 2026 earnings call transcript. Insider Monkey Transcripts and msn.com. February 19, 2026.

Glossary of terms

The AAII (American Association of Individual Investors) Sentiment Survey: This survey offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months.

Breakeven rates: The difference between yields of Treasury bonds and TIPS for issues of the same tenor/maturity, calculated by subtracting TIPS yields from Treasuries; a measure of inflation.

Capital expenditure (capex): Funds that companies spend to acquire, upgrade or maintain physical assets, such as buildings, technology or equipment, with the purpose of maintaining or growing future operations.

Duration: A measure of how much a bond’s price changes relative to changes in interest rates.

Option-adjusted spread (OAS): Measures the spread between a bond's interest rate and the risk-free rate, while adjusting for any embedded options like callables or mortgage-backed securities.

Personal Consumption Expenditures (PCE) and core PCE: Measures the price changes in goods and services purchased by US households; core PCE excludes food and energy prices. Both are measures of inflation.

Taxable-equivalent yield: The yield of a municipal bond investment calculated to reflect the benefits of income tax exemption and to be comparable to the yield of a taxable bond.

U-3 unemployment rate: The official measure used by the US Bureau of Labor Statistics (BLS) to report the percentage of the labor force that is unemployed and actively seeking work.

Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tight” in reference to spreads indicates small differences in yields.

Indexes

Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.

Bloomberg US Corporate High Yield Index: Tracks the performance of the USD-denominated, high yield, fixed-rate corporate bond market.

Russell 1000® Index: A market capitalization-weighted that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents the majority of total US market capitalization.

Russell 1000® Growth Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates.

Russell 1000® Value Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively lower price-to-book ratios and lower forecasted growth rates.

Russell 2000® Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

S&P 500® Index (SPX): A market capitalization-weighted index of 500 stocks, a measure of broad US equity market performance.

S&P 500 Equal Weight Index (EWI): The equal-weight version of the S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight, or 0.2% of the index total, at each quarterly rebalance.

S&P MidCap 400® Index: A market capitalization-weighted index of 400 stocks of mid-size companies, distinct from the large-cap S&P 500.

US Dollar Index: A basket of six foreign currencies (euro, Japanese yen, UK pound sterling, Canadian dollar, Swedish krona, and Swiss franc) used to track the relative strength of the US dollar, with a higher index value representing US dollar strength.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.

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

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

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.

The investment style may become out of favor, which may have a negative impact on performance.

Large-capitalization companies 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.

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.

WF: 8931559

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. 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. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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