What a Move!

by Chris Galipeau of Franklin Templeton, 5/13/26

Macro

Our real gross domestic product (GDP) growth rate forecast for 2026 is 2.5% (based on Franklin Templeton Institute’s Global Investment Management Survey), versus the Federal Reserve's (Fed’s) forecast of 2.3% and the Wall Street consensus view of around 2%. The main drivers of our GDP forecast are the continued capital expenditures (capex) spend by big tech to build out AI infrastructure (on the latest earnings call, AMD CEO Lisa Su said it is “early stages” of this spend), the resilient consumer and fiscal stimulus. The duration of the US-Iran conflict is the primary risk to our forecast. Higher oil prices are a tax on the consumer, and the negative impacts of higher oil/gas prices will likely broaden over time. The US economy appears to be in a strong position to weather this storm.
We entered 2026 with the expectation that the Fed would cut rates twice and core Personal Consumption Expenditures (PCE) would remain stable in the 2.5% to 3.0% range. Fed funds (FF) futures are telling us we are wrong on the rate cut call, and we adjusted our expectations down. We expect the Fed to stay on hold for the near term, with the possibility of a cut later in the year. The relationship of two-year Treasury yields relative to the FF rate supports this view; two-year yields historically lead the Fed and right now, the two-year yield is 3.91%, roughly in line with the FF rate. The last tick for core PCE data came in at 3.2%, the highest reading since November of 2023. Higher oil prices will bleed through to core PCE if oil prices stay elevated. The US unemployment rate (U3) stands at 4.3%, just off the recent high print in November of 4.5%.
Inflation expectations came in last week. One-year breakeven rates are now 2.98% and have effectively been tracking oil prices. This is the first two-handle since late January. Two-year breakeven rates are 2.79%, also down on the week. Finally, five-year breakeven rates are 2.61% and have been hovering between 2.60% and 2.70% for the last two months. These numbers represent the bond markets’ pricing of annualized inflation out one, two and five years.
On the currency front, we are expecting the US dollar to be essentially flat for the year despite the recent volatility. The US Dollar Index (DXY) is trading at US$98.10 and is in the middle of its 12-month range, defined as US$96‒US$100.

Equities

We are constructive on US equities and have established a year-end target range of 7,000–7,400 for the S&P 500, driven by 8%–13% year-over-year (y/y) earnings-per-share (EPS) growth (based on Franklin Templeton Institute’s Global Investment Management Survey). A note of caution here: After the S&P 500’s 17% rip since it reached an Iran-war low in late March, the relative strength index (RSI) on the index hit 75, up from 28 at the time the CBOE Market Volatility Index (VIX) hit 31 and the S&P 500 Index was trading at a low of 6,316. Technical analysts consider a reading of 70 as short-term overbought. The market is near the high side of our S&P 500 target (we will review that target in coming weeks). I’d expect some consolidation of this move either in terms of price, time, or both. (And, yes, I said that two weeks ago.) Finally, we expect volatility to persist until the Strait of Hormuz is fully open.
What a move it’s been since the March lows! Taking a quick look at the order of magnitude and the annualized run rate, the S&P 500 is up 17%, a 357% annualized run rate. The Nasdaq 100 Index is up 26%, an 834% annualized run rate. The Mag 7 group of stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) is up 27%, an 863% annualized run rate. You better sit down for this one…the Philadelphia Semiconductor Index is up 62% from its lows, a 1000% annualized run rate. Huge moves that need to consolidate, in my view. My approach: No chasing.
We reiterate our “broadening” call on equities and emphasize our bullish call on small- and mid-cap names in the United States and continue to favor emerging-market equities as well as Japanese equities. Additionally, the risk/reward balance in the Mag 7 names looks more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index now sits at US$335.93, up about US$4 in the past week and represents y/y EPS growth of 21%, above the high end of our forecast. Earnings estimates have steadily ticked up all year and as I’ve stated previously, earnings drive long-term stock prices—not geopolitics.
Our Franklin Templeton Institute Strategist Taylor Topousis tells us that earnings estimates for the S&P 500 are up about 8% from January 1. At the sector level, energy earnings estimates lead the pack, up 46% from January 1, with materials and technology both up about 16%, and communication services up 12%.
For a global comparison, S&P 500 estimates are up 8% from January 1, European estimates are up about 4%, and emerging markets estimates are up a whopping 25%.
We observe broad sector strength year to date (YTD). Seven of 11 Global Industry Classification Standard (GICS) sectors are outperforming the S&P 500 year-to-date. Energy leads at 24%, information technology at 13%, materials at 12%, industrials at 12%, communication services at 12%, real estate at 10%, and consumer staples at 10%.
We have fielded a lot of questions this week on the old Wall Street adage: “Sell in May and go away.” Does it work? It has not worked in nine of the last 10 years. Over the last 10 years, from May 1 through to December 31, the S&P 500 has a mean return of 7% with a 90% hit rate. The one down period from May 1 to December 31 was in 2022, with a 6% loss.
Midterm years of presidential cycles have typically been volatile with sub-standard returns. Franklin Templeton Institute Strategist Lukasz Kalwak tells us that the average peak-to-trough decline in the S&P 500 in midterm years is about 18%. What you might not know is that in the third year of the presidential cycle, the market has typically bounced back. The average S&P 500 rally from the midterm lows is about 32%. The hit rate of positive returns is 100%. Ergo, we need to buy any significant drawdowns just like we augured for in March. See our paper “From US concentration to global opportunity” and exhibits 11-13 for historical midterm data.
YTD abridged index performance summary: Emerging markets is the leader in the clubhouse at 22%, based on the MSCI Emerging Markets Index. The Russell 2000 Index is up 17%, the S&P MidCap 400 Index is up 13%, the Russell 1000 Value Index is up 12%, the Mag 7 is up 4%, and the Russell 1000 Growth Index is up 4%.
Bottom line: We believe it is prudent to have a diversified equity playbook that includes US large-, mid- and small-cap exposure, with a balance of growth and value. The same can be said for ex-US equity exposure, with a mix of emerging markets and developed international markets. Reduce concentration and spread your bets. Broad strength is your friend.

Fixed income

We expect the US 10-year Treasury bond yield to trade in a range of 4.0% and 4.25% for the year. The market traded slightly through the high end of our range, with yields now at 4.38%. We would consider adding duration risk if the yield moves north of 4.50%. The US yield curve has flattened recently, with the two year–10 year spread at 47 basis points (bps). We expect more bull steepening in 2026 but 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 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. For now, our approach would be to clip coupons.
Credit spreads have made big moves in the last month. Investment-grade (IG) spreads (one-year/three-year option-adjusted spreads, or OAS) are 52 bps over Treasuries, flat this past week. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 262 bps over Treasuries, in 6 bps on the week.
Historically, when IG credit spreads trade 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Index have been positive. Rick Polsinello, Franklin Templeton Institute Senior Market Strategist-Fixed Income, tells us that the US Aggregate Index has 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%. Again, the market is not there, but I would be ready to act if it trades at that level.
Similarly, when HY credit spreads have traded 600 bps over Treasuries, forward returns have been positive out three months with a median return of 12.82%, out six months with 22.35%, out nine months with 26.75%, and out 12 months with 29.98%. Again, the market is not there, but I would be ready 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, muni bonds offer potential diversification benefits relative to most fixed income mandates. Consider whether you could benefit from muni exposure in taxable accounts.

Sentiment

The percentage of bullish investors in the latest AAII Investor Sentiment survey held steady at 38%. The percentage of bearish investors in the AAII survey moved down seven ticks to 33%.
Bull markets peak on euphoria. In my opinion, we are a long way from that.

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

Source of data (except where noted) is Bloomberg as of May 8, 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.

Handle: The whole number in a quoted price, the number to the left of a decimal point.

Hit rate: The percentage of positive positions or returns over a specific period.

Magnificent Seven: Refers to shares of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.

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.

Relative Strength Index (RSI): A momentum indicator that measures the speed and magnitude of recent security price changes, used in technical stock market analysis.

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: 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.

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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