From the US Market Desk: Discipline over emotion worked again. Earnings ahead.

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Macro

• Our forecast for real gross domestic product (GDP) growth for 2026 is 2.5% (based on our Global Investment Management Survey), versus the Federal Reserve (Fed) forecast of 2.3% and the Wall Street consensus of around 2%. The main drivers of our GDP forecast are the continued big-tech capital expenditures, a resilient consumer and higher tax refunds, as well as the possibility of future interest-rate cuts, although rate cuts look unlikely from our perspective 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. But we also think the US economy is in a strong position to weather this storm.
• 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. Fed fund futures are telling us we are wrong on the 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 bleed through to core PCE if oil prices stay elevated. The U-3 unemployment rate is 4.3%, just off the recent high print in November of 4.5%. 
• 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 stated on multiple occasions that the “playbook” is to look through any oil-price-related situation. Taking Mr. Powell at his word, it seems unlikely the Fed will raise rates soon. Similarly, we know that the two-year 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 collapsed last week. One-year breakeven rates are now 3.46%, down from 5.10%, and have effectively been tracking oil prices. Two-year breakeven rates are 2.89%, down from 3.30% last week. Finally, five-year breakeven rates are 2.62%, 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 US Dollar Index (DXY) is currently trading at $98.80 and is in the middle of its 12-month range, defined as $96 to $100.

Equities

• We are constructive on US equities and have established a target range of 7,000 to 7,400 for the S&P 500 Index, driven by 8%‒13% year-over-year (y/y) earnings-per-share (EPS) growth (based on our Global Investment Management Survey). We don’t expect this geopolitical event to impact our outlook unless oil trades north of US$100 and stays there for months. Expect volatility to persist until the Strait of Hormuz is fully open.
• Multiples compressed over the past month, and earnings estimates continue to tick up. Remember, when stock prices are coming down, for long-term investors, the risk in owning stocks also tends to decline. This is especially important to remember during periods of high volatility when emotions can take over. That’s why we continue to emphasize discipline over emotion.
• We reiterate our bullish call on US small- and mid-cap stocks, and we remain constructive on emerging market equities and Japan. Additionally, the risk/reward profile of the Magnificent Seven (Mag 7) stocks looks more appealing today compared with the start of the year. All eyes are on earnings season.
• Speaking of emerging markets, 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 forward earnings power in emerging markets.
• We believe the broadening theme we have been advocating since January of 2025 will continue through this year. Consider this: Year-to-date through the market close on April 9, the Russell 2000 Value Index was up 10.59%, the S&P MidCap 400 Growth Index was up 9.08%, the S&P MidCap 400 was up 7.31%, the Russell 2000 Index was up 6.60%, the Russell 1000 Value was up 6.53%, the S&P MidCap 400 Value was up 5.44%, the S&P 500 Equal Weight Index (our measure for the “average stock”) was up 3.92%, the Russell 2000 Growth Index was up 2.97%, the Russell 1000 Index was up 0.05% and the S&P 500 Index was up 0.01%  That’s the good news. On the downside, the Mag 7 gang was down 7.58%, and the Russell 1000 Growth was down 5.77%. Manageable, I’d say, if one has a diversified portfolio, but it could be painful for those who are not diversified. This dispersion is great for active stock pickers, however.
• Outside of the United States, the MSCI Latin America Index was up 21.77% through April 9, the MSCI Emerging Markets Index was up 9.35%, the MSCI Japan Index was up 8.97%, the MSCI Europe was up 4.08%, and MSCI India was the laggard down, 10.05% (all index returns are in US dollars).
• We have a tool for gauging volatility for possible investment signals, and we consider a weekly close in the VIX (CBOE Volatility Index) of over 30 to indicate a potential entry point for taking more risk. That signal went live on Friday, March 27. We saw that discipline over emotion worked again. Let’s look at index performance from the close of March 27 to April 9: The Mag 7 was up 9.66%, the Nasdaq Composite was up 8.97%, the Russell 2000 Growth was up 8.28%, the Russell 1000 Growth was up 7.89%, the Russell 2000 Index was up 7.69%, the S&P 500 was up 7.20%, the Russell 2000 Value was up 7.08%, the Russell MidCap  Growth was up 7.07%, the S&P MidCap 400 was up 6.82%, S&P MidCap 400 Value was up 6.56%, Russell 1000 Value was up 6.22% and the S&P 500 Equal Weight Index was up 5.12%. Broad participation is bullish.
• Let’s review the historical performance when the VIX closes at 30 or higher on a weekly basis (the reason we have confidence in this signaling tool). Our analysis shows that when the VIX reached that weekly level, forward returns for the S&P 500 Index were positive; the three-month median forward return was 6.85% with an 80.28% hit rate; the six-month median forward return was 15.15% with a hit rate of 80.28%; and the one-year median, forward return was 23.46% with a hit rate of 88.57%. Remember, discipline over emotion.
• While past performance is not an indicator or guarantee of future results, the aforementioned volatility tool worked over the past couple of weeks. We are still mindful that the situation in the Middle East is not over. Maintain discipline. I use weekly swings of VIX 30 and VIX 50 as spots to increase risk profiles.
• The bottom line as I see it: It makes sense 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 consider it attractive to own emerging markets and developed international markets. In other words, I think it’s prudent to reduce concentration and spread bets. As noted, I use the VIX index parameters above as a barometer for further action.

Fixed income

• We expected the US 10-year Treasury bond yield to trade in a range of 4.0% and 4.25% for the year. The benchmark has traded slightly through the high end of our range, with yields now at 4.28%. I would consider adding duration risk if the yield goes north of 4.50%. The two-year yield also came in last week, at 3.77%. The US yield curve has flattened recently, with the 2-year/10-year spread at 51 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 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) are 54 bps over Treasuries, which means they moved in seven bps on the week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 279 bps over Treasuries, down 38 bps on the week. Corporate fundamentals remain healthy in our view, although there is stress in the system now.
• Historically, when IG credit spreads traded 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Bond Index were positive. Rick Polsinello, Senior Market Strategist-Fixed Income at Franklin Templeton Institute, tells us that 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%. The spread levels have not reached that threshold yet, obviously, but if the market trades there, it may be time to act.
• Similarly, when HY credit spreads traded to 600 over Treasuries, forward returns were positive out three months with a median return of 12.82%, out six months at 22.35%, out nine months at 26.75% and out 12 months at 29.98%. Again, the market is not there yet, but I would consider acting if it trades 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 marketplace has run its course for now, and muni bonds have been performing well since last August. We think this trend should continue. 

Sentiment

• The percentage of bullish investors in the AAII Investor Sentiment survey moved up two ticks this week to 36%. The percentage of bearish investors in the AAII survey dropped to 43%, down eight ticks from last 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% to consider taking action. Remember, this is a contrary indicator.

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 10, 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.