From the US Market Desk: Fundamental backdrop strong. Watch for pullbacks.

Get early access. Subscribe to the From the US Market Desk LinkedIn newsletter.

Macro

• Our real gross domestic product (GDP) growth 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 of around 2%. The main drivers of our GDP forecast are the continued capital expenditures (capex) spend by big technology companies to build out artificial intelligence (AI) infrastructure, the resilient consumer, and fiscal stimulus connected to the One Big Beautiful Bill Act. The duration of the Middle East 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. To that point, this past week we heard from Walmart (WMT) and Home Depot (HD), and both management teams said consumer spending is tepid, especially the low-end consumer. Walmart also said it is absorbing higher fuel costs, and those costs are impacting the bottom line.
• We expect the Fed to stand pat on interest rates as the conflict continues. The relationship of two-year Treasury yields relative to the federal funds (FF) rate supports this view. Two-year yields historically lead the Fed’s rate decisions, and currently the two-year yield is 4.10%, above the FF rate. FF futures are now pricing in a rate hike by next March. 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. The combination of higher oil prices and higher-than-expected inflation prints are serving to push interest rates up. The unemployment rate (U-3) is 4.3%, just off the recent high in November of 4.5% and essentially flat for the trailing 12-month period. The labor market is holding up, but real wages are starting to come under pressure.
• Inflation expectations were up a touch last week. One-year breakeven rates are currently at 2.91%, down 21 basis points (bps) on the week and have effectively been tracking oil prices. This is also the lowest level for one-year breakeven rates since January 21 of this year. Two-year breakeven rates are 2.77%, down 12 bps on the week. Finally, five-year breakeven rates are 2.62%, down 8 bps on the week, and they have been hovering between 2.60% and 2.70% for the last three 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$99.44, near the highs of its 12-month range, defined as US$96‒US$100.

Equities

• We are constructive on US equities and have established a target range of 7,000‒7,400 for the S&P 500 (based on Franklin Templeton Institute’s Global Investment Management Survey) driven by 8%-13% year-over-year (Y/Y) earnings-per-share (EPS) growth. We are reviewing that target now as earnings came in significantly stronger than expectations. I have been expecting some consolidation of this move either in terms of price, time or both, and that seems to be occurring now. I think that’s good news—and would suggest buying on pullbacks. 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 and continue to favor emerging market equities and Japan. Additionally, risk/reward in the Magnificent 7 names looks more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index is currently at US$337.76, up another dollar on the week, and represents Y/Y EPS growth of 15%, above the high end of our forecast. The tape is now 22x 2026 estimates, cheaper than at the start of the year. Earnings estimates have steadily ticked up all year and in the long term, earnings drive stock prices—not geopolitics.
• Speaking of earnings, and our bullish view of US small caps in general, have a listen to our latest “Talking Markets” podcast. This episode features Frank Gannon, Chief Investment Officer of Royce Investment Partners. Royce is a legendary small-cap manager, and Frank gives compelling reasons to own small caps.
• Let’s look at year-to-date performance in the United States: As of this writing, the Russell 2000 Value Index is leading the charge, up 15.51%; the S&P MidCap 400 Growth Index is up 14.38%; the Russell 2000 Index is up 14.29%; the Russell 2000 Growth Index is up 13.16%; the Russell 1000 Value Index is up 11.42%; the S&P MidCap 400 Index is up 9.92%; the S&P 500 Index is up 9.05%; the Russell 1000 Index is up 8.56%; the S&P 500 Equal Weight Index (our indicator of the “average stock”) is up 6.95; the S&P MidCap 400 Value Index is up 5.89%; the Mag 7 stocks are up 5.97%; and the Russell 1000 Growth Index is up 5.55%.
• Outside the United States, the MSCI Emerging Markets Index is up 17.42%; the MSCI Latin America Index is up 14.32; the MSCI Japan Index is up 11.22%; the MSCI Europe Index is up 5.74%; and the MSCI India Index is up 12.64% (total returns are in US dollars).
• A lot of questions have come up in the last few weeks 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 Index 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 election years have historically been volatile with sub-standard returns. According to analysis by Franklin Templeton Institute Strategist Lukasz Kalwak, the average peak to trough decline in the S&P 500 Index in midterm years was about 18%. What you might not know is that in the third year of the presidential cycle, the market has bounced back. The average S&P 500 rally from the midterm lows was about 32%. The hit rate of positive returns is 100%. Ergo, I would buy any significant drawdowns, similar to our call in March. See our paper, “From US concentration to global opportunity,” and exhibits 11-13 for historical midterm data.
• Bottom line: We believe it’s 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 diversify. Use consolidation to your advantage.

Fixed income

• We expect 10-year US Treasury bond to yield in a range of 4.0% and 4.25% for the year. The market traded through the high end of our range, with yields now at 4.59%. Much like we have the S&P 500 target under review, we also are reviewing our 10-year yield call. I have been stating that investors should consider adding duration risk north of 4.50%—well, here it is.
• The US yield curve has flattened recently, with the 2-year/10-year spread at 50 bps, pretty much unchanged for the last six weeks. We expect 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. Our approach would be to clip coupons.
• Credit spreads have made big moves (tightening) in the last two months. Investment-grade (IG) spreads (one-year/three-year option-adjusted spreads, or OAS) are now only 74 bps over Treasuries, and high-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 268 bps over.
• Historically, when IG credit spreads have traded 200 bps over, forward returns for the Bloomberg US Aggregate Bond Index have been positive. According to analysis by Rick Polsinello, Franklin Templeton Institute Senior Market Strategist-Fixed Income, 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%. The market is not there obviously, but if it trades there, we would consider buying.
• 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 22.35%, out nine months 26.75%, and out 12 months 29.98%. Again, the market is not there yet, but we 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 taxable fixed income mandates. Consider using some cash to add muni exposure in taxable accounts. Have a read of our latest piece on municipal bonds here “Municipal bonds are back.”

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey stood at 32%. The percentage of bearish investors in the survey stood at 44%. As I see it, there’s no signal here; it’s more like a swing back to the wall of worry.
• Bull markets typically 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 22, 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.