From the US Market Desk: 2026 Capital markets outlook

In this edition, we offer an outlook for 2026, highlighting parts of our recently completed Global Investment Management Survey of investment professionals across Franklin Templeton.

Macro

• We anticipate US real GDP growth to approximate 2.5% in 2026. This would be an acceleration from 2025, likely to result from a combination of a resilient consumer and continued capital expenditure (capex) by corporate America. Provisions in the 2025 One Big Beautiful Bill will also likely drive higher tax refunds in the second quarter (Q2) of 2026, deregulation is likely ahead, as well as a lower cost of capital; all of these are tailwinds.
• We believe core personal consumption expenditures (PCE), a measure of inflation, can move lower throughout the year. Our forecasted range is 2.5% to 3.0%. Tariff impacts will likely be behind us, and rental prices, the major contributor to the shelter cost category of core inflation, should continue to moderate.
• The Federal Reserve (Fed) is likely to continue bringing the federal funds rate down throughout the year, albeit at a more measured pace. We are penciling in two rate cuts in 2026. That would bring the terminal rate down to 3.25%‒3.50% by year-end.
• The US 10-year Treasury note yield is likely to be rangebound, from 4% to 4.25%.
• We believe the US dollar will largely remain unchanged from current levels.

Equities

• We maintain our bullish stance on US equities and establish a new S&P 500 Index target range of 7,000 to 7,400 for 2026.
• We expect S&P 500 earnings to grow in a range of 8%‒13% next year.
• Importantly, our highest-conviction call is for the equity market to continue to broaden out amid improving earnings breadth across capitalization size and investment style. We think balanced exposure to both large-cap growth and value makes sense.
• We believe small-cap stocks should have a strong year as the cost of capital comes down while US GDP accelerates. Moreover, we find the strongest forward, two-year cumulative earnings growth to be in the Russell 2000 Index. We find it attractive to increase exposure to small caps.
• Emerging market equities have our attention. A combination of low absolute and relative valuations appear to be in place, as is the catalyst to create a rerating of multiples. All in, emerging market equities have the strongest cumulative earnings growth expectations from 2026 through to 2027. We regard earnings growth as the catalyst for increasing exposure.
• At the sector level, we favor industrials, health care, technology and utilities.
• At the factor level, we believe free cashflow yield, return on invested capital and return on equity will generate alpha. We favor a focus on quality.
• Historically, when the Fed has cut interest rates after a pause, as the Fed has been doing in recent months, global equity returns have been positive. Worth repeating the old adage: “Don't fight the Fed.” Read our recent white papers, “How US equities and US fixed income performed with a resumption of Fed easing” and “How global equities and fixed income performed with a resumption of Fed easing”
• Key risks to be aware of include geopolitics, earnings coming in below expectations and a Fed policy mistake.

Fixed income

• We believe the US 10-year Treasury note will trade in a range, with yields between 4% and 4.25%. As a result, we think duration risk won't help drive returns, nor will it hamper returns. 
• We expect the yield curve to continue to bull-steepen, meaning that we expect short-term rates to fall by more than the rates farther out on the yield curve.
• We believe short-duration fixed income mandates and corporate credit will likely both outperform cash. It is likely that part of the current mountain of cash in the United States (over US$7 trillion is in money market funds)¹ will find its way into the bond market, as reinvestment risk rises commensurate with cash yields declining.
• We expect both investment-grade and high-yield credit spreads to widen only modestly but remain relatively tight against a backdrop of strong corporate fundamentals and a resilient economy.
• High-yield fixed income offers attractive all-in yields against a backdrop of accelerating GDP and strong fundamentals.
• Municipal bonds can offer diversification benefits, not only relative to equities but also to taxable fixed income (excluding corporate bonds), and they continue to offer what we consider to be attractive taxable equivalent yields.

From the US Market Desk will take a pause during the last two weeks of 2025. We expect markets to be relatively quiet, but in case of a significant market event, we’ll provide insight in a special edition.

We wish you and yours a happy and safe holiday season and a happy new year.

Source of data (except where noted) is Bloomberg as of December 12, 2025. 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.