From the US Market Desk: Now what?

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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 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.