From the Market Desk: Stay diversified

Macro

• The US economy remains resilient. The Atlanta Federal Reserve (Fed’s) GDPNow model as of February 2 shows 4.2% growth in real gross domestic product (GDP) for the fourth quarter (Q4) of 2025. Remember, this data is noisy and the estimate 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 (Google and Amazon this past week reported higher capex), a resilient consumer (Costco confirmed this view last week, and large banks made similar comments earlier in January) and the impact of tax refunds in coming months, as estimates suggest refunds may be US$100 billion‒US$150 billion over 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.
• Inflation expectations have moved up in the near term. One-year breakeven rates are now 3.33%, up from 2.80% a few weeks ago and significantly higher relative to where they were in mid-December (2.25%). Two-year breakeven rates are 2.71%. Five-year breakeven rates are 2.48%. These numbers represent the 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, we are expecting the US dollar to be essentially flat for the year despite the recent volatility. The US Dollar Index is trading at $98, at the same level from mid-April. It continues to trade in a range defined as $96‒$100 that has held for the last nine months.

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, as expected earnings-per-share growth of 8%‒13% year-on-year (y/y) should drive stock prices higher.
• As you may have read in previous updates, we have been on the “broader market” train since January of 2025 (read Get ready for a broader US equity market). Our operating thesis from that research is playing out largely as we expected. Consider this: From the market close of December 31, 2024 through the close of February 5, 2026, the Russell 1000 Value Index rose 22%, while the Russell 1000 Growth Index was up 12%. The Russell 2000 Index was 17% higher, in line with the S&P 500 Index. This rotation is good news, in our view. It means the market is reacting to broader earnings power.
• The equity market is correcting in certain spots. For example, through the close on Thursday, February 5, the Russell 1000 Growth Index was down 5.71% from its recent high. The Magnificent Seven (Mag 7) basket (the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) was down 4.56%. Why? It’s likely a combination of concentrated positioning, doubts about the return on investment from this massive capex spend, which was on display last week with both Google and Amazon guiding Wall Street analysts to a capex spend that is well above what the Street was expecting (this is effectively a negative surprise shock), and the realization that earnings power plus a more favorable valuation backdrop can be found in other areas.
• I offer you this: The equal-weight version of the S&P 500 trades at about 17x this year’s earnings estimate. The S&P MidCap 400 Index also trades at about 17x this year’s earnings estimate, as does the Russell 1000 Value Index. The Russell 2000 Index trades at about 19x this year’s earnings estimate, when adjusted for the companies with positive earnings. The S&P 500 trades at about 22x this year’s earnings estimate. The Russell 1000 Growth Index trades at about 27x this year’s estimate. Right now, the valuation premium is coming out of the big Russell 1000 names. Everything else looks reasonable to us. We think the relative valuation is driving the rotation.
• So why is there “panic at the disco?” The S&P 500 is 3% off its all-time high. The equal-weight version of the S&P 500 is up 4.22% year-to-date (YTD) and made a new all-time high Wednesday, February 4. Our take: It makes sense to stay diversified.
• Stocks follow earnings over time and, broadly speaking, we think earnings growth looks fine in the United States. As stated above, we estimate earnings growth to be between 8% and 13% y/y. Earnings growth is also strong outside the United States. The cumulative earnings growth rates for 2026 and 2027 are strongest in emerging markets at +33%, Europe at +24%, and Japan at +21% (source: Bloomberg).
• We reiterate that it is time to consider 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; we believe it’s a good time to consider exposure to emerging markets and developed international markets. Our conclusion: Reduce concentration and spread your exposures.

Fixed income

• We expect US 10-year bond yields to trade in a range of 4.0% to 4.25% for the year. The market is currently at the upper end of that range at 4.18%. The two-year Treasury yield has been range-bound for the last few months, and the US Treasury yield curve has steepened modestly, with the 2-year to 10-year spread at 72 basis points (bps), a new high for the move. We expect more bull steepening in 2026.
• We expect short-duration fixed income mandates and corporate credit to outperform cash in 2026, as they did last 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.
• 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 46 bps over, up 2 bps on the week. High-yield (HY) spreads (as proxied by the Bloomberg US Corporate High Yield Index OAS) are 275 bps over, up 16 bps on the week. Both measures are very close to five-year tights. Corporate fundamentals appear healthy. Significant spread compression from here seems unlikely to us, both in IG and HY space. 
• We are bullish on municipal bonds again this year and find taxable-equivalent yields attractive, along with robust fundamentals. Importantly, the increased supply in the muni marketplace seems to have run its course for now, and muni bonds have been performing well since last August. We think this should 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 dropped to 39% last week from 44% in the previous week. The percentage of bearish investors in the AAII survey was 29%, flat on the week.
• Neither of these readings are at extremes here.

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

Source of data (except where noted) is Bloomberg as of February 6, 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.