From the US Market Desk: The broadening will continue until morale improves

Macro

• The US economy remains resilient. The Atlanta Federal Reserve (Fed’s) GDPNow model as of January 26 shows 4.2% growth in real gross domestic product (GDP) for the fourth quarter (Q4) of 2025. Note that this model is noisy, and the number can and does change quickly.
• Our US real GDP forecast for 2026 is 2.5% (based on our  Global Investment Management Survey), versus the 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 expenditure (capex) spending by big technology firms (Meta recently reported plans for even higher investments), a resilient consumer (as Royal Caribbean recently reported and large banks reported roughly two weeks ago) and the likely impact of higher tax refunds this year, which estimates suggest may be run US$100 billion‒US$150 billion above 2025 (source: Strategas). 
• We expect the Fed to cut rates twice in 2026 and core Personal Consumption Expenditures to remain stable in the 2.5%‒3.0% range. Fed policymakers are more concerned with the employment picture than they are with inflation. They should be. The U-3 unemployment rate was 4.4% as of December, the highest level since October of 2021. Fed Chair Powell’s comments at the January 28-29 policy meeting suggest the Fed is in no hurry to cut interest rates, and the risks to its dual mandate are more “balanced” today compared with a few months ago. Time will tell.
• Kevin Warsh is US President Trump’s nominee to be the next Fed chair. Warsh was on the Fed’s Board of Governors from 2006 to 2011. He is currently an advisor to Stanley Druckenmiller’s Duquesne Family Office. Warsh seems inclined to believe in lower policy rates as well as working on the Fed’s balance sheet.
• Inflation expectations shot up this week. One-year breakeven rates are currently 3.31%, up from 2.80% a few weeks ago and significantly higher than in mid-December, when they were about 2.25%. This move could be a reaction to rising oil/commodity prices. Two-year breakeven rates are 2.81%, up from 2.54% a few weeks ago. Five-year breakeven rates are 2.55%, up 15 basis points (bps) over the last few weeks. These numbers represent bond market pricing of annualized inflation expected in the coming one, two and five years. This trend is concerning in the near term.
• On the currency front, our survey sees the US dollar essentially flat in 2026, despite a 3.5% decline over the last eight trading days. The dollar is now back to the lows of 2025.

Equities

• We are constructive on US equities and have established a target range of 7,000 to 7,400 for the S&P 500, with likely 8%‒13% year-on-year (y/y) earnings-per-share (EPS) growth to play a key role in driving stocks.  
• History shows stocks follow earnings over time. In the US market, the strongest cumulative growth in earnings power for 2026 and 2027 appears to be in the small- cap arena, with earnings growth for small growth companies estimated to be +116%, for small core, +95%, and for small value, +84%. We continue to find it an attractive time for increasing exposure to small caps. This is not a new call. We have been bullish on small caps since January of 2025.
• At the same time, forward cumulative earnings growth appears robust across the board. Looking across capitalization size, investment style and indexes, cumulative earnings growth rates range from +24% to +116% (source: Bloomberg). Everything appears to participate. Equity portfolios can position for this broad earnings power through broad and diverse equity exposure across company size and investment style.
• We observe the same phenomenon when looking at the S&P 500 Global Industry Classification (GIC) sectors. Forward two-year earnings growth rates range from +15% to +43%, led by the information technology sector (source: Bloomberg). Note that every sector shows likely growth.
• Broad earnings power is evident outside the United States as well. The cumulative growth forecasts for 2026 through 2027 are strong, with emerging markets leading at +33%, Europe at +24% and Japan at +21%. It is an attractive time to have exposure outside the United States if that is a part of your allocation.
• We believe the conclusion is straight-forward: It is time to consider 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 if ex-US equity exposure is part of your strategy—we consider it an attractive time to own emerging markets and developed international markets. We believe earnings trends today suggest it is best to avoid narrow concentration and spread equity investments more broadly. We have just produced a research paper supporting our outlook, “Broadening momentum: From US technology leadership to US small caps and emerging markets.”
• Some of you have asked me if I think the small cap move is just the “January Effect,” referring to a seasonal pattern for stocks, especially small caps, to perform well in the first month of the year. Fair question. Let’s look at the data: In the trailing 12-month period (January 29, 2025 to January 29, 2026), the Russell 2000 Index is up 17.52% vs. 16.23% for the S&P 500 and 21.99% for the Magnificent Seven (Mag 7) basket (the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla). Small caps have been outperforming the S&P 500 for the past year. This is not the “January Effect.”  Similarly, from the April 7, 2025 lows, the Russell 2000 is up 47.78% vs. 38.62% for the S&P 500. This is broad participation, it’s not a recent phenomenon, and we expect it to carry through for all of 2026 with bursts of rotation.   
• I recently recorded a podcast with Kate Lakin, Director of Research and Portfolio Manager at Putnam Investments. We discussed the equity market and what to expect going forward. Have a listen to our discussion.

Fixed income

• We expect US 10-year Treasury bond yields to trade in a range of 4.0%‒4.25% in 2026. The market is currently at the upper end of that range, at 4.23%. The two-year yield has been range-bound for the last few months as well, and the US yield curve has steepened modestly, with the 10-year–two-year spread at 67 bps. We expect more bull steepening in 2026.
• We expect short duration fixed income mandates and corporate credit will likely perform better than 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. 
• Despite fears of a looming credit crisis, we see little evidence of that in corporate bond spreads. Investment-grade spreads (one-year to three-year option-adjusted spreads, or OAS) are 44 bps over Treasuries. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate High Yield Index OAS, are 259 bps over Treasuries. Both measures are very close to five-year tights. These indicators suggest corporate fundamentals remain healthy. Significant spread compression from here seems unlikely to us, in either IG or HY space.  
• We are bullish on municipal bonds again this year and find taxable equivalent yields to be attractive along with robust fundamentals. Importantly, the increased supply in the muni marketplace appears to have run its course for now, and muni bonds have been performing well since last August. We think this steady performance is likely to continue. 
• Please see our recent white paper, “Municipal bonds are back” by Richard Polsinello and Lukasz ⁠Labedzki. This paper captures the opportunity in municipal bonds, in our opinion.

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey is 44.4%, which is up from the 19.3% reading in March of 2025. The percentage of bearish investors in the AAII survey is 30.8%, which is down from the 62% reading in the first week of April 2025.

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

Source of data (except where noted) is Bloomberg as of January 30, 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. 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.