Our forecast for 2026 real gross domestic product (GDP) growth is 2.5% (based on our Global Investment Management Survey). This is higher than the Federal Reserve (Fed) forecast of 2.3% and the Wall Street consensus of around 2%. The main drivers of our GDP forecast are the continued capital expenditure (capex) spending by big technology firms and a resilient consumer, along with the higher tax refunds likely in 2026 and possible future interest-rate cuts. The duration of the current Middle East conflict is the primary risk to our forecast. Higher oil prices resulting from the conflict work like a tax on the consumer, and the negative impacts of higher oil prices will broaden over time. The sooner this conflict ends, the better.
We expect the Fed to cut interest rates twice in 2026 and core personal consumption expenditures (PCE) to remain stable in the 2.5% to 3.0% range. Fed fund (FF) futures at the moment indicate that our rate-cut call is wrong. The last tick for core PCE data came in at 3.1%. If oil prices stay elevated, the impact will bleed through to core PCE. The U-3 unemployment rate for February was 4.4%, just off the recent high print in November of 4.5%, which was the highest level going back to October of 2021.
The conflict in the Middle East, should it persist and drive oil prices higher for longer, could put the Fed in a box with respect to its dual mandate. Fed Chair Jerome Powell said as much in his recent press conference, when I lost count of how many times he said “uncertainty” and “friction.” FF futures have reacted to exactly that. At the start of the year, the futures market was pricing in 2-3 interest-rate cuts. Now, the market is pricing no cuts this year and maybe a slight chance of a rate hike. Similarly, we know that the two-year Treasury note yield historically leads the Fed’s rate decisions, and the two-year note yield is 3.98% as of this writing. Right now, the bond market is saying there will be no rate cuts.
Inflation expectations have moved up in the near term. One-year breakeven inflation rates are now 5.11%, an alarming move to say the least. No doubt some of this move—maybe even all of it—is because of higher oil prices. Two-year breakeven rates are 3.26%. Five-year breakeven rates are 2.63%. These numbers represent the bond markets pricing of annualized inflation expected over the coming one, two and five years. The shorter-term numbers indicate concerns, certainly, but the longer-term, five-year number is still anchored.
On the currency front, we think the US dollar will be essentially flat for the year despite the recent volatility. The US Dollar Index is trading at US$99.90 and is at the high side of its 11-month range, defined as US$96 to US$100. Many investors are concerned about the US dollar losing value, and some believe the dollar has recently weakened materially. However, the fact is that the dollar is at the same level today as it was in April of 2025 and higher than it was in early July of 2025, late September of 2025 and mid-January of 2026.
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, based on expected earnings-per-share growth of 8% to 13% year-over-year (based on our Global Investment Management Survey). We don’t expect this geopolitical event to impact our outlook unless oil trades north of US$100 for months. We expect high levels of volatility to persist in the near term.
Multiples are compressing. At the start of 2026, the price-earnings (P/E) ratio for the S&P 500 Index was 22.5 on 2026 earnings. As of the close on March 26, 2026, the P/E multiple on this year’s earnings for the S&P 500 was 20.07. The multiple on 2027 earnings was 17.38. The valuation has become more reasonable. Remember, when multiples come down, all else equal, so does the risk involved in owning stocks.
What I find more interesting is this: Earnings estimates have been rising across the board. With the exception of the Russell 2000 Growth Index, every other US index has seen earnings estimates rise relative to the start of the year. This is also true outside of the United States, with the exception of Europe; estimates are up for emerging markets and Japan.
Right now, this tape feels like death by a thousand paper cuts. We are held hostage to the situation in the Middle East and expect to be in this pattern until an off ramp comes into view. Still, the broadening theme we have been advocating since January of 2025 continues. Consider this YTD performance: Through the market close on March 26, the Russell 2000 Value Index was up 4.81%, the S&P MidCap 400 Growth Index was up 3.64%, the S&P MidCap 400 Index was up 2.11%, the Russell 1000 Value Index was up 1.44%, the S&P MidCap 400 Value Index was up 0.49%, the Russell 2000 Index was up 0.74%, and the S&P Equal Weight 500 was up 0.18% (the Equal Weight Index is a measure for the average stock, which means the average stock is up). That’s the good news. On the downside, the Magnificent Seven basket (the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) was down 13.29%, the Russell 1000 Growth Index was down 10.64%, the S&P 500 Index was down 5.12%, and the Russell 1000 Index was down 4.95%. This market performance is bearable if you are diversified, but painful if you are not diversified. This dispersion is great for active stock pickers, in my view.
As for YTD performance through March 26 outside of the United States, the MSCI Latin America Index was up 11.90%, the MSCI Emerging Markets Index was up 3.50%, and the MSCI Japan Index was up 4.55%. The MSCI Europe Index was down 3.06%, and the MSCI India Index was the laggard, down 13.45%. All of the international return data is in US-dollar terms.
Let’s talk about where we are right now and how to deal with volatility. I think it’s time for discipline over emotion. It’s time to have a plan. I am keeping watch on the S&P Volatility Index (VIX). If the VIX closes above 30 on a weekly basis, I think it’s probably an attractive time to dollar-cost average into equities. This is step one.
Since 1990, when the VIX closed at 30 or higher on a weekly basis, forward returns for the S&P 500 were positive. The median three-month forward return was 6.85% and the hit rate for positive returns was 80.28%. The median six-month forward return was 15.15%, and the hit rate was with a hit rate of 80.28%. The median one-year forward return was 23.46% with a hit rate of 88.57%. Discipline over emotion.
Similarly, if things get out of hand, and the VIX closes over 50 on a weekly basis, I think it’s time to get more aggressive if you have cash to put to work. This is step two: Rather than dollar-cost averaging, my approach is to buy quality stocks on price weakness, even baskets like the Magnificent Seven. In the periods since 1990 when the weekly VIX closed above 50, the median forward one-year return was 24.06%, with a 100% hit rate. Again, I emphasize discipline over emotion. Markets bottom on bad news, after all. Remember April 2025?
The “Rule of 16” is a handy tool to help gauge the magnitude of potential S&P 500 price movements when the VIX is elevated. The calculation is: (VIX Index level/16) = likely daily price movement in percentage terms. For a VIX reading of 32 this gauge would project a 2% daily movement in the S&P 500 Index (32/16 = 2%).
Here is the bottom line: Our Institute believes it’s best to have a diversified equity playbook including large-, mid-, and small-cap exposure in the United States with a balance of growth and value. The same can be said for ex-US equity exposure; we favor positions in emerging markets and developed international markets. To act on the broadening theme, considerreducing concentration and diversifying portfolio exposure. The VIX index parameters described above can be helpful for deciding further action.
Fixed income
We expected US Treasury 10-year bond yields to trade in a range of 4.0% and 4.25% during 2026. Last week, though, yields blasted through the high end of this range, reaching levels higher than 4.40%. Given our outlook, we would consider adding duration risk, if the 10-year yield goes north of 4.50%. The two-year Treasury yield also just punched out of its range with the last trade at 3.98%. The US yield curve has flattened recently, with the two-year-to 10-year spread at 42 basis points (bps). We expect more bull steepening for the yield curve in 2026, but we are on the wrong side of that call at the moment.
We expect short-duration fixed income mandates and corporate credit to outperform cash again this year. Considering our views on US 10-year Treasury 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, although recent spread widening might create an opportunity for additional total return.
Credit spreads have made big moves in the last few weeks. Investment-grade (IG) spreads (one-year/three-year option-adjusted spreads, or OAS) are 59 bps over Treasuries. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, reached 308 bps over Treasuries. We believe corporate fundamentals remain healthy, although there is stress in the system now.
Historically, when IG credit spreads traded 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Bond Index have been generally positive. Rick Polsinello, Senior Market Strategist for Fixed Income at Franklin Templeton Institute, highlights this data: When spreads reach the 200-bps threshold, the US Aggregate index has had median forward returns out three months of 1.92%, out six months of 4.19%, out nine months of 4.75% and out 12 months of 3.97%. The market is not at the spread threshold yet, but if it trades to that level, we would view it as a buying opportunity.
Similarly, when HY credit spreads trade 600 bps over Treasuries, forward returns have historically had mostly positive results out three months with a median return of 12.82%, out six months with a median of 22.35%, out nine months with a median of 26.75%, and out 12 months with a median of 29.98%. Again, the market is not there yet, but it may be attractive to act if it trades there.
We are bullish on municipal bonds 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 positive trend can continue.
Sentiment
The percentage of bullish investors in the latest AAII Investor Sentiment survey actually moved up two ticks last week to 32%. The percentage of bearish investors in the AAII survey ticked down two turns to 50%.
Neither of these readings is at extremes, but sentiment is growing more cautious. I watch to see the bullish percentage under 25% and the bearish over 55%. Remember, this is a contrary indicator.
I will continue to analyze the markets and will offer insights again next week.
Source of data (except where noted) is Bloomberg as of March 27, 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.
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.
Federal funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.
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.
Tape: A reference to broad market performance, based on the ticker tape that transmitted stock prices during the 19th and 20th centuries.
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 Aggregate Bond Index: The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. Please note an investor cannot invest directly in an index.
Bloomberg US Corporate High Yield Index: Tracks the performance of the USD-denominated, high yield, fixed-rate corporate bond market.
MSCI Emerging Markets Index: A free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets.
MSCI Europe Index: A free float-adjusted, market capitalization index that is designed to measure developed market equity performance in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
MSCI India Index: This index is designed to measure the performance of the large- and mid-cap segments of the Indian market. With 64 constituents, the index covers approximately 85% of the Indian equity universe.
MSCI Latin America Index: This index captures large and mid-cap representation across 5 Emerging Markets (EM) countries in Latin America.
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.
Russell 2000® Growth Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively higher price-to-book ratios and higher forecasted growth rates.
Russell 2000® Value Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively lower price-to-book ratios and lower forecasted growth rates.
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.
The S&P MidCap® 400 Growth Index: An unmanaged, float-adjusted market capitalization-weighted index comprised of stocks from the S&P MidCap 400 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.
The S&P MidCap® 400 Value Index: An unmanaged, float-adjusted market capitalization-weighted index comprised of stocks from the S&P MidCap 400 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.
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.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX): A measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.
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.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
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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.
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