From the US Market Desk: Earnings drive stock prices

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Macro

• Our forecast for 2026 real gross domestic product (GDP) growth is 2.5% (based on Franklin Templeton Institute’s Global Investment Management Survey), versus the Federal Reserve (Fed) forecast of 2.3% and the Wall Street consensus view of around 2%. One of the main drivers of our GDP forecast is the continued capital expenditure (capex) spending by big technology companies to build out AI infrastructure. This was evident in earnings reports in late April from Texas Instruments and Intel. Last week Caterpillar’s earnings results, along with Google and Amazon, reinforced the strong capex spending theme. Also, the consumer remains resilient, as described in last week’s earnings comments from Coca-Cola, Pepsi, Starbucks, General Motors, Visa, Mastercard and Apple. Finally, higher tax refunds are filtering through and helping to offset some of the sting we are seeing from higher gas prices. We also saw strong jobs data last week. The duration of the US-Iran war 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. We think the US economy is in a strong position to weather this storm. 
• We entered 2026 with the expectation for the Fed to cut interest rates twice and core personal consumption expenditures (PCE) to remain stable in the 2.5% to 3.0% range. Federal fund (FF) futures are telling us we are wrong on the rate cut call, and we are adjusting our expectations down. We expect the Fed to stay on hold for the time being with the possibility of a cut later in the year. This view is also supported by the relationship of two-year Treasury yields relative to the FF rate. Two-year yields historically have led the Fed’s decisions, and right now, the two-year yield is 3.86%, 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, if they stay elevated, will bleed through to core PCE. The U-3 unemployment rate is 4.3%, just off the recent high print in November of 4.5%. 
• Inflation expectations ticked up last week. One-year breakeven rates rose to 3.24% and have effectively been tracking oil prices. Two-year breakeven rates were 2.96%, also up on the week. Finally, five-year breakeven rates are 2.68% and have been hovering between 2.60% and 2.70% for the last two months. These numbers represent the bond market’s 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$97.84 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: With the S&P 500’s 15% rip since it reached an Iran-war low in late March, the Relative Strength Index (RSI) on the S&P 500 has risen to 73, up from 28 when the CBOE Volatility Index (VIX) reached 31 and the S&P 500 Index was trading at a low of 6,316. Technical analysts typically view an RSI reading at or above 70 as suggestive of short-term overbought conditions in stocks. I’d expect some consolidation of the market move either in terms of price, time, or both. Finally, we expect volatility to persist until the Strait of Hormuz is open.
• We reiterate our “broadening” call on equities and emphasize our bullish call on small- and mid-cap names in the United States; we also continue to favor emerging market (EM) equities and Japan. Additionally, the risk/reward profile of the Magnificent Seven (Mag 7) names (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) is more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index now sits at US$331.81, up about US$4 in the last week, and this represents y/y EPS growth of 20%, above the high end of our earlier forecast. Earnings estimates have steadily ticked up all year, and in the long term, earnings drive stock prices—not geopolitics.
• Last week was critical for earnings reports. We heard from Coca-Cola, Pepsi, Caterpillar, Starbucks, Visa, Mastercard, General Motors, Qualcomm, Amazon, Google, Apple, Seagate and Microsoft. Revenue and earnings growth were strong overall, and forward guidance was also strong. The big tech names reinforced the strength of the AI-use trend and the capex spend, as did Caterpillar. The consumer-related names reinforced the commentary from the big banks: The consumer remains resilient.
• Through April 30, 60% of the S&P 500 companies have reported earnings. According to RBC Capital Markets, 72% have beaten revenue estimates, and 81% have beaten earnings estimates.
• Nine of 11 S&P 500 sectors have positive returns year-to-date (YTD), led by energy, up 30%. Eight of 11 S&P 500 sectors are outperforming the S&P 500 YTD with consumer discretionary, financials and health care lagging. All in, I’d call this broad strength, which fits with our broadening call.
• YTD index performance (total return) through the close of April 30 is as follows: The Russell 2000 Value Index, up 15.25%; the Russell 2000 Index, up 13.32%; the S&P MidCap 400 Growth Index, up 12.34%; the S&P MidCap 400 Index, up 10.55%; the Russell 2000 Growth Index, up 11.55%; the Russell 1000 Value Index, up 10.39%, the S&P MidCap 400 Value Index, up 8.67%; the S&P 500 Equal Weight Index (our indicator of the “average stock”) up 6.66%; the S&P 500 Index, up 5.69%; the Russell 1000 Index, up 5.49%, the Russell 1000 Growth Index, up 0.95%, and the Mag 7 basket, up 1.05%. Overseas, the MSCI Latin America Index is up 18.36%, the MSCI Emerging Markets Index is up 14.61%, the MSCI Japan Index is up 10.96% and the MSCI India Index is down 10.54%. Foreign total returns are in US dollars.
• Finally, I have been fielding a lot of questions about equity returns in midterm years. It’s true that midterm years usually have lower equity returns. What is less known is that the third year of the presidential cycle has historically produced the strongest S&P 500 returns. Going back to 1970, the S&P 500 has averaged 17% returns in year three of presidential terms. I would view any significant midterm-related equity weakness as a potential buying opportunity. See our paper “From US concentration to global opportunity” and exhibits 11-13 for historical midterm data.
• According to Citadel Securities, US companies YTD have authorized US$544 billion in stock buybacks. That’s bullish.
• Bottom line: We favor 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 is true for ex-US equity exposure; we believe EM and developed international markets both have attractive outlooks. Our approach: Reduce concentration and spread your bets. Broad strength is your friend.

Fixed income

• We expect US 10-year Treasury bond yields to trade in a range of 4.0% to 4.25% for the rest of the year. These yields are a little above the high end of this range, with yields now at 4.35%. We would consider adding duration risk if yields rise north of 4.50%. The US yield curve has flattened recently, with the two-year–10-year spread at 49 basis points (bps). We expect more bull steepening for 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 perform better than cash 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. For now, our approach is to clip coupons.
• 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 hovering at 53, essentially flat during last week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, were 268 bps over Treasuries, four bps tighter on the week.   
• Historically, when IG credit spreads trade 200 bps over Treasuries, 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 index has 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 there, obviously, but if they trade to that level, bonds become more attractive.
• Similarly, when HY credit spreads trade at 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, municipal bonds can offer 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 AAII Investor Sentiment survey slid eight ticks this week, to 38%. The percentage of bearish investors in the AAII survey rose six ticks, to 40%. These moves surprised me, considering stock prices are higher—wow!   
• Bull markets peak on euphoria. 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 and Franklin Templeton Institute, as of May 1, 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.