From the US Market Desk: What a move!

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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 (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.