Micro Over Macro

by Chris Galipeau of Franklin Templeton, 8/17/26

Macro

Our real gross domestic product (GDP) forecast for 2026 is 2.5% (based on our Global Investment Management Survey) versus the Federal Reserve’s (Fed's) forecast of 2.2% and the Wall Street consensus of around 2%. The economy remains resilient and the consumer is strong. The only thing that could throw us a curveball would be a policy mistake by the Fed. We do not anticipate that.
Last week there were a handful of economic data points. The July Consumer Price Index and Producer Price Index reports were market-friendly on the heels of the prior week’s release of the Institute of Supply Management manufacturing and services data, which pointed to continued economic expansion. I try not to get caught up in the point in time data, but combined, these reports are constructive. The economy is humming along.
Our core Personal Consumption Expenditures (PCE) forecast for the year is 3.0% - 3.5%; the June reading was 3.3%.
The two-year note yield stands at 4.13%, down from the recent high of 4.36%. It is still about 50 basis points (bps) over the federal funds rate, but off the boil. Remember, the bond market leads the Fed, not the other way around.
Breakeven rates remain well-behaved. One-year breakeven rates are 1.65%, two-year breakeven rates are 2.13%, and five-year breakeven rates are 2.22%. These numbers represent the bond markets’ pricing of annualized inflation out one, two, and five years. Breakevens are still at odds with the message from two-year yields, but they are beginning to converge. That is good news for risk assets.
Meanwhile, the fed funds futures market is indicating there is a 35% chance of a 25-bps hike in September and a 38% chance of a hike in December. This data moves very fast, so this picture can and will change quickly depending on incoming data. This is also off the boil.
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 $99.85.

See more: Connecting the Dots Between Micro & Macro Factors Impacting the Economy

Equities

We are constructive on US equities and have established a year-end target range of 7400 - 7800 for the S&P 500, driven by 15+% Y/Y earnings-per-share (EPS) growth. Second-quarter (Q2) earnings are BOOMING, with EPS growth rates of about +47% Y/Y and with EBIT margins approaching 17%. Much of this EPS power is Magnificent Seven-driven in Q2. If we remove the impact of Google and Amazon’s investments in OpenAI and Anthropic, the Y/Y earnings growth number is about 30%. Consensus expectations (Bloomberg) for 2026 now sit at US$362.25, up about 23% Y/Y. For 2027, the consensus earnings estimate stands at US$405.16, representing a 13% Y/Y growth rate versus 2026. The EPS growth is incredible considering we usually only see this sort of Y/Y acceleration when the economy is exiting a recession. (See Franklin Templeton Institute’s Global Investment Management Survey for more on earnings and our forecasts.)
Bloomberg reports that in Q2, 25 firms in the S&P 500 Index have quantified the use of artificial intelligence (AI) on their income statements, saying that on average they have seen 180 bps of margin growth. This is the first inning of hearing about AI impact, I suspect. Meaning, going forward I’d expect we hear more companies quantify the impact of AI on their businesses. Accretive to margins is bullish.
In Q2, 76% of companies are beating on their top line, stronger than the five-year average of 70%. Similarly, 86% of companies are beating EPS estimates, stronger than the five-year average of 78%. Broad and strong.
If we assume the consensus earnings estimates are reasonably correct, that puts the tape at 21.37x this year’s earnings and 19.11x 2027 estimates. The long-term historical, forward multiple is about 17x. Portfolio managers are now focusing their efforts on corporate earnings power for calendar year 2027. I can’t make a strong argument that the tape is “cheap” here, but I also can’t make the argument that a 19.11x forward multiple is crazy rich either—unless bond yields move significantly higher. We don’t expect that, but it is a risk.
All 11 S&P GICS sectors have positive earnings YTD. The top-three performers are energy +36%, information technology +25%, and industrials +19%. In January, our top-three favorite sectors for the year were energy, tech, and industrials. It’s working.
The tape is recognizing broad fundamental strength. Consider this: The cap-weighted S&P 500 Index is up 13.95% year-to-date (YTD) through August 12, and the S&P 500 Equal Weight Index is up 16.49%. The S&P 400 MidCap Index is up 18.86% and its equal-weighted version is up 16.78%. The Russell 2000 Index is up 23.66% and its equal-weighted version is up 21.81%. No single name is dominating. Everything is participating.
Bottom line: We think it’s prudent to have 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 for ex-US equity exposure; emerging markets and Japanese stocks look attractive. That involves reducing concentration and spreading one’s bets. We favor buying on pullbacks.

Fixed Income

We expect the 10-year US Treasury bond to yield in the range of 4.25% - 4.75% for the year. As of this writing, the last trade was 4.64%. We think adding duration risk makes sense around 4.75% or so. Core and core plus strategies should get closer looks, should rates remain elevated.
The US yield curve twisted steeper. The two-year/10-year spread is now 50 bps, out 8 bps on the week.
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. Clipping coupons looks attractive.
Credit spreads remain well behaved in the face of higher yields. Investment-grade spreads, as proxied by the Bloomberg US Corporate 1-3 year Option-Adjusted Spread (OAS), are now 45 bps over comparable Treasuries. Investment-grade spreads are still a few basis points from five-year tights. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 267 bps over. These are both relatively tight levels from a historical perspective, reflecting a strong fundamental backdrop with corporate profitability being the main driver.
We are bullish on municipal bonds and find taxable equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds can offer potential diversification benefits in the form of low correlations to various equity markets, relative to most taxable fixed income mandates. The market is on pace for another year of record supply; however, tight spreads in taxable bonds have helped the markets absorb these high supply levels.

Sentiment

The percentage of bullish investors in the latest AAII survey (the week ending August 12) ticked down to 35%, a very low reading. The percentage of bearish investors in the AAII survey is 38%. The wall of worry is still in place.
Bull markets peak on euphoria. I don’t think we are there yet.

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 August 13, 2026. Important data provider notices and terms are 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.

Earnings per share (EPS): The portion of a company's profit allocated to each outstanding share of common stock. An index EPS is an aggregation of the EPS of its component companies.

EBIT: Earnings before interest and taxes.

Fed funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.

Global Industry Classification Standard (GICS®): Developed in 1999 by S&P Dow Jones Indices and MSCI, GICS was designed in response to the global financial community’s need for accurate, complete and standard industry definitions.

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 callable or mortgage-backed securities.

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.

Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tights” 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.

Russell 2000® Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

S&P 500® Index: A market capitalization-weighted index of 500 stocks, a measure of broad US equity market performance.

S&P 500 Equal Weight Index: 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.

S&P MidCap 400® Index: A market capitalization-weighted index of 400 stocks of mid-size companies, distinct from the large-cap S&P 500.

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.

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