Macro
- Our forecast for US real gross domestic product (GDP) growth in 2026 is 2.5% (based on our Global Investment Management Survey), versus the Federal Reserve (Fed) forecast of 2.2% and the Wall Street consensus of around 2%. The main drivers of our GDP forecast are the continued, massive capital expenditure by big technology companies to build out artificial intelligence infrastructure, the resilient consumer, and fiscal stimulus connected to the One Big Beautiful Bill Act.
- We expect the Fed to stand pat as the market works through this conflict. The new Fed Chair, Kevin Warsh, spoke at his first press conference Wednesday. The Open Market Committee’s Summary of Economic Projections (known as the “dot plot,” which Warsh did not participate in) showed that five Fed voters favor two rate hikes this year. They moved their forecast for core Personal Consumption Expenditures (PCE) to 3.3%, which happens to be right on top of our forecast (see Franklin Templeton Institute’s Global Investment Management Survey). My takeaway from the press conference was that we should expect changes in the way the government collects economic data and assesses the timeliness of that data. This is an issue that we have been talking about for decades—namely that using backward-looking, hard-to-collect data is not ideal when it comes to setting policy. My favorite part of the press conference was this quote from Warsh: “Financial markets are the most important source of information.” I agree with that wholeheartedly.
- To that end, the bond market, fed fund futures market, and currency markets all moved quickly as Warsh spoke, especially bond yields. The reason that I referenced the two-year note yields every week is because, historically, two-year note yields have led Fed action. Warsh doesn’t have to provide guidance on the “balance of risks,” the bond market tells us what we need to know. US two-year Treasury yields closed at 4.19% on June 18, about 50 basis points (bps) above the effective fed funds rate. That suggests the bond market is taking the possibility of two rate hikes seriously. Fed fund futures are now pricing in one-and-a-half rate hikes by December of this year. As of this writing, 10-year Treasury yields are 4.48%. As a result, the yield curve flattened significantly at the end of the trading week, and the 2-year/10-year yield spread fell to 29 bps.
- Inflation expectations have taken a round trip. One-year breakeven rates are now 1.97%, the lowest in two years. Two-year breakeven rates are also at two-year lows, near 2.25%. Finally, five-year breakeven rates are 2.32%, back to where they were in January. The bond market seems less concerned about inflation becoming untethered relative to the headlines. These numbers represent the bond markets’ pricing of annualized inflation out one, two and five years. It’s worth pointing out that oil prices are 37% off the US-Iran war highs. Something must give here, as breakeven rates are showing us a different look at forward inflation risk relative to both the two-year yield and the Fed’s new core PCE forecast.
- 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 US$100.38, near the highs of its 12-month range, defined as US$96‒US$100. It has traded here a handful of times in the last 12 months.
Read more: Federal Reserve Press Conference: Lots to Unpack, but Inflation Is Not a Choice
Fixed Income
- We expect the 10-year US Treasury bond yield to range from 4.25%‒4.75% for the year, above our prior range of 4.25%‒4.50%. Last week it traded to 4.48%. We think duration risk becomes more attractive with a yield near 4.75%.
- The US yield curve flattened quickly on the heels of Fed Chair Warsh’s comments on June 17. The 2-year/10-year Treasury yield spread moved all the way down to 29 bps. This is a function of the move higher in two-year yields (10-year yields have been well-behaved), and two-year yields exploded 15 bps after Warsh spoke. More hawkish than expected.
- 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. It’s attractive to clip coupons.
- Credit spreads have made big moves (tightening) in the last two months. Investment-grade (IG) bond spreads are now only 45 bps over Treasuries, and high-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY Option-Adjusted Spread (OAS), are now 265 bps over. The market is calm relative to what happened with two-year yields.
- We are bullish on municipal bonds and find taxable-equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds offer potential diversification benefits relative to most taxable fixed income mandates. Consider using some cash to add muni exposure in taxable accounts. Read our latest research on this asset class: “Municipal bonds are back.”
Sentiment
- The percentage of bullish investors in the latest American Association of Individual investors (AAII) survey was 37%. The percentage of bearish investors in the AAII survey was 39%. No signal here but a swing back to the wall of worry.
- Bull markets typically peak on euphoria. I think 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 June 18, 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.
Glossary of terms
The AAII (American Association of Individual Investors) Sentiment Survey: This survey offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months.
Breakeven rates: The difference between yields of Treasury bonds and TIPS for issues of the same tenor/maturity, calculated by subtracting TIPS yields from Treasuries; a measure of inflation.
Capital expenditure (capex): Funds that companies spend to acquire, upgrade or maintain physical assets, such as buildings, technology or equipment, with the purpose of maintaining or growing future operations.
Duration: A measure of how much a bond’s price changes relative to changes in interest rates.
Federal funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.
Hit rate: The percentage of positive positions or returns over a specific period.
Magnificent Seven: Refers to shares of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.
Option-adjusted spread (OAS): Measures the spread between a bond's interest rate and the risk-free rate, while adjusting for any embedded options like callables or mortgage-backed securities.
Personal Consumption Expenditures (PCE) and core PCE: Measures the price changes in goods and services purchased by US households; core PCE excludes food and energy prices. Both are measures of inflation.
Tape: A reference to broad market performance, based on the ticker tape that transmitted stock prices during the 19th and 20th centuries.
Taxable-equivalent yield: The yield of a municipal bond investment calculated to reflect the benefits of income tax exemption and to be comparable to the yield of a taxable bond.
U-3 unemployment rate: The official measure used by the US Bureau of Labor Statistics (BLS) to report the percentage of the labor force that is unemployed and actively seeking work.
Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tight” in reference to spreads indicates small differences in yields.
Indexes
Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
Bloomberg US Corporate High Yield Index: Tracks the performance of the USD-denominated, high yield, fixed-rate corporate bond market.
MSCI Emerging Markets Index: A free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets.
Russell 1000® Index: A market capitalization-weighted index that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents the majority of total US market capitalization.
Russell 1000® Growth Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates.
Russell 1000® Value Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively lower price-to-book ratios and lower forecasted growth rates.
Russell 2000® Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
Russell 2000® Growth Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively higher price-to-book ratios and higher forecasted growth rates.
Russell 2000® Value Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively lower price-to-book ratios and lower forecasted growth rates.
S&P 500® Index (SPX): A market capitalization-weighted index of 500 stocks, a measure of broad US equity market performance.
S&P 500 Equal Weight Index (EWI): The equal-weight version of the S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight, or 0.2% of the index total, at each quarterly rebalance.
US Dollar Index: A basket of six foreign currencies (euro, Japanese yen, UK pound sterling, Canadian dollar, Swedish krona, and Swiss franc) used to track the relative strength of the US dollar, with a higher index value representing US dollar strength.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.
Diversification does not guarantee a profit or protect against a loss.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
The investment style may become out of favor, which may have a negative impact on performance.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
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