From the US Market Desk: Short week and an about-face

Introduction

• That certainly did not feel like a holiday-shortened week! Geopolitics took center stage, with concerns from Greenland to Japan. US President Trump’s ambitions in Greenland, the threat of new tariffs on European exports and rising government bond yields in Japan rattled the markets on Tuesday. Stocks sold off about 2% as investors looked to take some risk off the table. However, both politics and markets did a 180-degree about-face by the end of the week, on news of a “framework” reached at the World Economic Forum in Davos, Switzerland, for US involvement in Greenland (with no use of military force, while allowing more military bases and troops), and Japan government bond (JGB) yields recovered a bit.
• As is usually the case, geopolitical issues lead to uncertainty and volatility, which create opportunities (“buy the dips, sell the rips”), particularly for active managers. This could be a catalyst for many investors (with US$7 trillion on the sidelines) to start putting money to work. Now we just need to keep our fingers crossed that the financial markets will not be as cold and icy as forecasts show for more than half of the United States in the last week of January.

Macro

• The US economy has remained very resilient. During an interview in Davos, Bank of America CEO Brian Moynihan said his firm’s most recent full-year 2026 outlook is indicating real US gross domestic product (GDP) growth should come in at/around 2.8% for the full year in 2026. That, coupled with the Atlanta Federal Reserve (Fed) GDPNow model’s estimate as of January 21 shows 5.4% real growth for the fourth quarter (Q4) of 2025, the strongest reading since December of 2021. It should be taken with a grain of salt though, as this data can be noisy and moves around a bit.
• Our real US GDP forecast for 2026 is 2.5% (based on Franklin Templeton’s Global Investment Management Survey) versus the Fed’s forecast of 2.3% and the Wall Street consensus of around 2%. Quarterly earnings calls seem to have a consistent message for the most part: consumers remain resilient, the backdrop is solid and there is reason for optimism regarding the outlook. If we layer in the impacts of potential further Fed easing and the estimated fiscal stimulus we will likely get over the next quarter or so from the One Big Beautiful Bill Act, the environment certainly feels pretty constructive. 
• Our base case is that the Fed may cut rates by 25 basis points once or twice in 2026 and that core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, will remain stable in the range of 2.5% to 3.0%. Starting at the Jackson Hole, Wyoming, meeting last August, the Fed has focused its concern more on the other side of its unique dual mandate—full/maximum employment. The unemployment rate was 4.4% at the end of December after moving slightly lower during the last month of 2025, and the most-recent initial jobless claims came in at 200,000, slightly lower than the consensus expectation of 208,000. These are not huge changes or surprises, but the trend can be your friend.
• On the currency front, our survey expects the US dollar to be essentially flat in 2026 with the possibility of some further weakening, but only slightly if at all.

Equities

• We are constructive on US equites and have established a target range of 7,000 to 7,400 for the S&P 500 Index for 2026. We think 8% to 13% year-on-year (y/y) earnings-per-share (EPS) growth will be the key driver. Historically, earnings have been the primary driver of equity returns over time, and we don’t see a reason why this would change anytime soon. Going back to 1950, the correlation of S&P 500 earnings and S&P 500 price movement is 0.98.¹ Looking ahead, the cumulative earnings growth rates in the United States for 2026 and 2027 appear to be strong and broad, led by the Russell 2000 Index. Every index, investment style and market cap are part of the picture. We believe this broad earnings power suggests having diverse equity exposure. In January of 2025, we wrote a white paper titled "Get ready for a broader US equity market." We believed then, as we do today, that with earnings power spreading beyond the Magnificent Seven (Mag 7) names, the tape would broaden out. The broadening call is not new for us; we started seeing this broadening begin in July of 2024. The Russell 2000 has now outperformed the S&P 500 every day over the last couple of weeks.
• Cumulative earnings growth rates for 2026 and 2027 look strong around the world with emerging markets remaining in the lead. We remain bullish global equities, with a special focus on emerging market equities that offer the strongest forward growth rates and a diverse set of drivers, both country and sector. European earnings power is forecast to remain robust, as does forward earnings power in Japan. We favor increasing international positioning. 

Fixed income

• We expect the US 10-year Treasury bond yield to trade in a range of 4.0%‒4.25% during 2026. It is currently at the upper end of that range at 4.24%, as rates sold off to start last week on the “sell America” theme before rallying back a bit from almost 4.3%. The two-year yield has been range-bound for the last few months as well, and the US Treasury yield curve has steepened modestly, with the 10-year-to-two-year spread moving from 48 basis points (bps) on October 29, 2025, to 63 bps today. We expect more bull steepening in 2026 as the Fed eases a bit. It is worth noting that the effective federal funds rate is still slightly above the two-year rate. The market is not pricing in a full (25 bps) rate cut until the second half of this year, with slightly under two cuts priced in by year-end.
• We continue to believe short-duration fixed income mandates and corporate credit should outperform cash in 2026. 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 a crisis in corporate bond spreads. Investment-grade (IG) spreads (one-year to three-year option-adjusted spreads, or OAS) are 45 bps over Treasuries. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, are 250 bps over. Both measures are now at multi-year tights. On this measure, corporate fundamentals remain healthy. Significant spread compression from here in either IG or HY space seems unlikely to us.
• We remain bullish on municipal bond investments again this year and find taxable-equivalent yields to be attractive; we also see 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 in 2026. 
• Please see our recent white paper, “Municipal bonds are back,” that I wrote and updated with assistance from Franklin Templeton Institute Senior Analyst Lukasz ⁠Labedzki. This paper captures the opportunity in municipal bonds we continue to believe in as a team.

The Fed

• It was a relatively quiet week as the Fed was in its blackout period ahead of its next policy meeting, which concludes January 28. No cut is expected at this meeting; however, we will be listening closely for any changes in the Fed’s language, particularly the perception of incoming data related to the labor market and the inflation picture.
• The future makeup of the Fed is still somewhat uncertain. The Trump administration clearly has a strong preference for a central bank that is dovish and favors lower interest rates. However, it seems Fed Chair Powell will serve out his full term until mid-May of this year, and Fed Governor Lisa Cook appears to have the backing of the Fed and the Supreme Court (although the Court has made no formal rulings yet on her case or the legality of the International Emergency Economic Powers Act, or IEEPA, tariffs). Meanwhile, the “other Kevin,” Kevin Warsh, appears to be taking the pole position from Kevin Hassett to be the next Fed Chair, with the administration also still considering BlackRock’s Rick Rieder and Fed Governor Christopher Waller. Warsh is viewed as being potentially the most hawkish of these remaining candidates.

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey is 43.2%, up from the 19.3% reading in March of 2025 but down from the 49.5% of a week ago. The percentage of bearish investors in the latest week is 32.7%, down from 62% in the first week of April 2025 but up from the 28.2% reading in the prior week of January.
• Neither of these readings is at extremes, but they are getting close! We are watching for warning signs if the percentage of bulls trades north of 55% and the percentage of bears trades around 20%.

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 23, 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