From the US Market Desk: Resilience meets overbought readings

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Macro

• Our real gross domestic product (GDP) growth forecast for 2026 is 2.5%, versus the Federal Reserve’s (Fed) forecast of 2.3% and the Wall Street consensus of around 2%. The main drivers of our GDP forecast are the continued capital investment (capex) by big technology firms, a resilient consumer and higher tax refunds, and the possibility of future interest-rate cuts, although rate cuts look unlikely from the viewpoint of today. The duration of the Middle East 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 and gas prices will broaden over time. The US economy is in a strong position to weather this storm. Last week, the management teams of JP Morgan and Bank of America reinforced this view during their earnings calls. Both management teams highlighted a resilient economy and a resilient consumer. Pepsi’s CEO commented to CNBC that the consumer is resilient, globally.
• We expect the Fed to cut rates twice in 2026 and core Personal Consumption Expenditures (PCE) to remain stable in the 2.5%‒3.0% range. The fed fund futures market is telling us we are wrong on the interest-rate cut call at the moment. The last tick for core PCE data came in at 3.0%, versus expectations of 3.0%. Higher oil prices will likely bleed through to core PCE if oil prices stay elevated. The U-3 unemployment rate is 4.3%, just off the recent high print of 4.5% last November. 
• 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 has recently stated on multiple occasions that the “playbook” is to look through any oil-price-related situation. Taking Powell at his word, it seems unlikely the Fed will raise rates soon. Similarly, we know that the two-year Treasury note yield historically leads the Fed, and the two-year note yield is 3.77% as of this writing. Right now, the bond market is saying the Fed will do nothing.
• Inflation expectations were stable last week. One-year inflation breakeven rates were 3.56%, down from 5.10%, and have effectively been tracking oil prices. Two-year breakeven rates were 2.92%, down from 3.30% in the previous week. Finally, five-year breakeven rates were 2.67% and have been steady for the last few weeks. 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 Dollar Index (DXY) is trading at $98.25 and is in the middle of its 12-month range, defined as $96‒$100.

Equities

• We are constructive on US equites and have established a target range of 7,000‒7,400 for the S&P 500 Index based on our outlook for 8%-13% year-on-year earnings-per-share (EPS) growth (based on Franklin Templeton Institute’s Global Investment Management Survey). I add a note of caution here: After the S&P 500’s 11% rally in recent weeks, the relative strength index (RSI) for the S&P is 70. The RSI has risen from 28 when both the CBOE Volatility Index (VIX) reached 31 and the S&P 500 hit a low of 6,316. An RSI reading of 70 is considered a signal of short-term overbought conditions. I expect some consolidation in the index move. Finally, we expect volatility to persist until the Strait of Hormuz is fully open.
• We reiterate our “broadening” call on equities and emphasize our bullish call on US small- and mid-cap stocks. We also continue to favor emerging market (EM) equities and Japan. Additionally, I find the risk/reward balance in the Magnificent Seven names (the Mag 7 are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) more appealing today versus the start of the year. I believe earnings and earnings guidance will be the next catalyst for the tape.
• Speaking of EMs, have a listen to Putnam Emerging Market Equity Portfolio Manager Brian Freiwald in our latest Talking Markets podcast. Brian shares his views and zeros in on EMs’ forward earnings power.
• As I have written in recent weeks, I consider a weekly VIX close over 30 as an initial entry point for taking risk up. That signal went live on Friday, March 27. Discipline over emotion worked again! Let’s look at index performance from the close of March 27 through April 16: the Mag 7 stocks were up 17.91%, the Nasdaq Composite Index rose 15.08%, the Russell 1000 Growth jumped 13.74%, the Russell 2000 Growth nearly matched that at 13.62%, the small-cap Russell 2000 was up 11.10%, the S&P 500 was up 10.62%, and the S&P MidCap 400 Growth Index was up 9.01%, while the Russell 2000 Value Index advanced 8.52%, the S&P MidCap 400 was up 8.11%, the S&P MidCap 400 Value was up 7.17%, the Russell 1000 Value was up 7.08%, and the S&P 500 Equal Weight Index was up 6.49%. Broad participation is typically bullish.
• At the factor level, we observe relative strength in both the MSCI international momentum factor, up 9.07%, and the MSCI international quality factor, up 8.10%, versus the MSCI USA momentum factor up 7.96% and the MSCI USA quality factor up 3.11%.  This pairs well with our bullish stance on emerging market equities.
• The majority of questions from Franklin Templeton clients last week were centered on the risks present in the Middle East versus the move up in equities. I would point to a few things here. First, the US economy has been strong, and recent earnings have also been strong. Second, when the VIX index has closed above 30 on a weekly basis, it has been a favorable time to increase risk exposure in equities, regardless of the news flow. That view worked once again in recent weeks, with an 11% gain in the S&P 500 over 12 days. Second, according to Citadel, in the past five trading days the firm saw the largest amount of retail call-option-buying they have ever seen on their platform. Third, according to Goldman Sachs, commodity trading advisors (CTAs) bought $86 billion of equities in the past five trading days, which ranks among the top five largest amounts in history. Looking forward, Citadel reminds us that corporate buybacks will start next week with the largest amount ever authorized. This is a mix of mechanical buying and retail “buying the dip,” coupled with a strong US economy and a resilient US consumer. Earnings estimates have remained solid during this conflict as well. The stock market has a strong track record in estimating future earnings.
• My bottom line is to have a diversified equity playbook that includes 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; I find it attractive to own emerging markets, along with developed international markets. My approach is to reduce concentration and spread bets.

Fixed income

• We expect the 10-year US Treasury bond yield to trade in a range of 4.0% to 4.25% this year. The yield traded slightly through the high end of our range last week to 4.30%. I would consider adding duration risk if the yield rises above 4.50%. The two-year yield also came in last week to 3.77%. The US yield curve has flattened recently, with the two-year–10-year spread at 54 basis points (bps). We expect more bull steepening of 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) were 52 bps over Treasuries, in 2 bps on the week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, were 269 bps over Treasuries, in 10 bps on the week.  
• Historically, when IG credit spreads have traded 200 bps over, forward returns for the Bloomberg US Aggregate Bond Index have been positive. Rick Polsinello, Senior Market Strategist-Fixed Income at Franklin Templeton Institute, tells us that when spreads reached those levels, the US Aggregate Bond Index 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%. Spreads are not at the thresholds yet, obviously, but if we trade there I view it as a potential buying opportunity.
• Similarly, when HY credit spreads have traded at 600 bps over Treasuries, forward returns have been positive out three months with a median return of 12.82%, out six months with a 22.35% median return, out nine months with a 26.75% median return, and out 12 months with a 29.98% median return. Again, not there yet, but it may be prudent to be ready to act if we trade 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 muni marketplace has run its course for now, and municipal bonds have been performing well since last August. We think this trend is likely to continue. 

Sentiment

• The percentage of bullish investors in the AAII Investor Sentiment survey moved down four ticks last week, to 32%. The percentage of bearish investors in the survey was 43%, unchanged from the previous week. 
• Neither of these readings is at an extreme, but sentiment is cautious. I would want to see the bullish percentage under 25% and the bearish percentage over 55% from this contrary indicator to view it as a potential signal. For now, the wall of worry is still in place.

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

Source of data (except where noted) is Bloomberg as of April 17, 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.