From the US Market Desk: Now What?
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- 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 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) by big technology firms to build out artificial intelligence (AI) infrastructure, the resilient consumer and fiscal stimulus connected to the One Big Beautiful Bill Act of 2025. The duration of the US-Iran conflict is the primary risk to our forecast. Higher oil prices work like a tax on the consumer, and the negative impacts of higher oil/gas prices will broaden over time. Nevertheless, we believe the US economy is in a strong position to weather this storm.
- We expect the Federal Reserve (Fed) to stand pat as we work through this conflict. This view is also supported by the relationship of two-year yields relative to the federal funds (FF) rate. Two-year yields historically have led the Fed and right now, the two-year yield is 4.07%, above the FF rate. FF futures are now pricing in an interest-rate hike by next March (2027). The last tick for core Personal Consumption Expenditures (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. We also had hot Producer Price Index (PPI) and Consumer Price Index (CPI) reports for April last week. The combination of higher oil prices and higher-than-expected inflation prints are serving to push rates up. The US unemployment rate (U3) is 4.3%, just off the recent high print in November of 4.5% and essentially flat for the trailing 12-month period. Jobs are fine, in our view, but real wages are starting to come under pressure.
- Inflation expectations were up a touch last week. As of this writing, one-year breakeven rates are at 3.12% and have effectively been tracking oil prices. Two-year breakeven rates are 2.89%, also up on the week. Finally, five-year breakeven rates are 2.70% 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$99.20 now, near the high 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 Index, 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 a 17% rip upward from the March market lows, the relative strength index (RSI) on the S&P 500 hit 75 before easing down now to 70; it is still up from 28 when the CBOE Volatility Index (VIX) weekly change hit a recent of high of 31, just as the S&P hit a low point of 6,316 (the VIX indicator is an important buy signal to technical analysts). Analysts interpret the new RSI reading of 70 as short-term overbought conditions for stocks. The S&P 500 has also risen to the high side of our 2026 target (which we will review as we survey Franklin Templeton investment professionals in coming weeks). I’d expect some consolidation of the market’s move either in terms of price (smaller price movements), time (slower price movements), or both. We expect volatility to persist until the Strait of Hormuz is fully open again to shipping traffic.
- What a market move! I need to admit, this rip has me worried in the short-term. The fundamental drivers remain in place, with reported first-quarter earnings significantly above the market consensus expectations. That’s the good news. Actually, it’s great news, but my work in technical analysis makes me think the market needs to consolidate from this move. I’ll admit that the semiconductor sector stocks are giving me flashbacks to the first quarter of 2000. What worries me is the parabolic shape (ascending slope) of the move, along with a new exchange-traded fund launch that raised US$10 billion in six weeks. Call me old-fashioned, but that smells like speculation. Maybe I’m just old. Maybe I’m just wrong. But I am not looking to commit new capital until this tape takes a break.
- We reiterate our “broadening” call on equities and emphasize our bullish call on small- and mid-cap stocks in the United States and also continue to favor emerging market (EM) equities and Japan. Additionally, the risk/reward profile of the Magnificent 7 names (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) looks more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index now sits at US$336.58, up another $1 on the week, and it represents year-over-year (y/y) EPS growth of 21%, which is above the high end of our forecast. Earnings estimates have steadily ticked up all year, and in the long term, history shows earnings drive stock prices—not geopolitics.
- Franklin Templeton Institute Market Strategist Taylor Topousis tells us that S&P 500 earnings estimates have risen about 8% from January 1, 2026. At the sector level, energy earnings estimates lead the pack, up 46% since 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 equity estimates are up about 4%, and emerging markets EM estimates are up a whopping 25%.
- We observe broad sector strength year-to-date (YTD). Six of 11 Global Industry Classification (GIC) sectors are outperforming the S&P 500 YTD. Energy is leading at 31%, while information technology is at 18%, communication services is at 11%, consumer staples is at 11%, materials at 10%, and industrials at 10%. Financial services is the laggard at -7%, with health care at -6%.
- Here’s an interesting statistic: YTD there are 170 names, or 34% of the index components, outperforming the S&P 500. There are 333 names, or 66% of the index components, underperforming the S&P 500. And believe it or not—there are 242 names, or 41% of the components, down on the year. Talk about stock picking!
- I received many questions last week about the old Wall Street adage, “sell in May and go away.” Namely, does it work/is it a good maxim? I can tell you that it has not worked in nine of the last 10 years. Over the last 10 years (2016-2025), for periods from May 1 through to December 31, the S&P 500 has a mean return of 7% with a 90% hit rate. The only down May-December period was in 2022 with a 6% loss.
- Midterm election years are historically volatile with sub-standard returns. Franklin Templeton Institute Market Strategist Lukasz Kalwak tells us that the average peak-to-trough decline in the S&P 500 in midterm years since 1930 was about 20%. What you might not know is that in the third year of the presidential cycle, the market has bounced back. Since 1950, the average S&P 500 rally from the midterm lows is about 32%. The hit rate of positive returns is 100%. Ergo, we would consider investing during any significant drawdowns, just like we highlighted the opportunity in March. See our paper “From US concentration to global opportunity” and exhibits 11-13 for historical midterm data.
- Bottom line: We find it attractive to have a diversified equity playbook that includes US large-, mid-, and small-cap stock exposure, with a balance of growth and value. The same can be said for ex-US equity exposure; we favor a mix of both EM and developed international markets. In my view, it makes sense to reduce concentration and diversify. 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. Yields traded through the high end of our range and are currently 4.58%. Much like we have the S&P 500 target under review, we also have the 10-year yield call under review. I have been writing that investors should consider adding duration risk if the yield goes north of 4.50%—well, here it is. The US yield curve has flattened recently, with the two-year‒10-year spread at 51 basis points (bps); that’s pretty much unchanged for the last six weeks. We expect more bull steepening of the yield curve 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, we consider it attractive to clip coupons.
- Credit spreads have made big moves in the past month. Investment-grade IG spreads (one-year/three-year option-adjusted spreads, or OAS, are 49 bps over, three turns tighter on the week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 264 bps over, out 2 bps on the week.
- Historically, when IG credit spreads have traded 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Index have been positive. Rick Polsinello, Senior Market Strategist-Fixed Income, tells us that in such periods historically, the Bloomberg US Aggregate Bond Index had median forward returns looking 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%. Spreads are not there, but if the market trades there it is a potential opportunity.
- Similarly, when HY credit spreads traded 600 bps over, 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, spreads are not there but we would be ready to act if they rise there.
- We are bullish on municipal bonds and find taxable-equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds offer potential diversification benefits relative to most fixed income mandates. Consider the potential tax advantages of deploying cash to muni exposure in taxable accounts.
Sentiment
- The percentage of bullish investors in the latest AAII Investor Sentiment survey is 39%. The percentage of bearish investors in the AAII survey is 36%. We see no technical signal in these numbers.
- Bull markets typically peak on euphoria. We think the market is 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 and Franklin Templeton Institute, as of May 15, 2026. 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.
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: 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.
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.
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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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.
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