Here We Go Again—Another Hiking Cycle?

Macro

All eyes this week were on Federal Reserve (Fed) Chair Kevin Warsh and the Federal Open Market Committee (FOMC) meeting. As expected, the FOMC raised interest rates by 25 basis points (bps). This was the Fed’s first hike since July 2023; between then and now the FOMC had cut rates six times.
The core Personal Consumption Expenditures (PCE) measure—which excludes food and energy—has been above the Fed’s 2% inflation target for over five years, and it has averaged 3.3% over the past six months. We expect core PCE to end the year in the range of 3.0%-3.5% (based on our Global Investment Management Survey.)
With US unemployment still at 4.1% in August and a better-than-expected weekly jobless claims number reported on Thursday, the Fed is firmly focused on the price stability end of its mandate.
Solid economic growth so far this year is also giving the Fed room to raise interest rates. The Federal Reserve Bank of Atlanta’s GDPNow forecast currently calls for 5.1% economic growth in the third quarter. This forecast is volatile but is pointing toward strong growth expectations into year-end. Our real gross domestic product forecast for 2026 is 2.5%, based on our survey.
Released with the FOMC’s rate decision Wednesday, the Summary of Economic Projections implied one more rate hike in 2026, and zero next year. Meanwhile, fed funds futures are currently projecting just short of three rate hikes between now and the end of 2027.

See more: Fed Policy: As Good As It Gets

Equities

Market performance has been broad this year (see our piece “Broadening Delivered. Now Prepare for Volatility”). The Russell 1000 Value Index (+21.6%) and Russell 2000 Index (+17.0%) are both outperforming the S&P 500’s 12.5% return year-to-date. All three indexes are outperforming the Magnificent Seven, which is up 11.3%. Internationally, the MSCI Emerging Markets Index, +22.2%, is still outperforming, while the MSCI EAFE Index is keeping pace with the S&P 500. We think staying diversified is the right approach moving forward.
Since the Fed’s last hike in 2023, the S&P 500 Index soared 72.4%, or 18.9% annualized, despite persistent inflation and a host of geopolitical and trade tensions.
We looked back at the six times the Fed has started a distinct hiking cycle since the central bank began announcing its policy decisions in 1994. These first hikes occurred in 1994, 1997, 1999, 2004, 2015 and 2022. In five of the six periods, the initial rate hike was followed by at least five additional hikes. 1997 was the lone period when the Fed only hiked once.
Past initial Fed hikes were often followed by short-term equity weakness, with a median three-month return for the S&P 500 of -3.8%. The median maximum drawdown within the first 12 months of the initial hike was 11.4%. Despite this volatility, the index was positive 12 months after the initial hike in four of the six periods, with a median return of 6.2%.
In our view, investors should be prepared for volatility. With growth and earnings still supportive, we are biased to use selloffs as opportunities to rebalance and add to long-term positions. The largest risk to equity markets as it pertains to the Fed is that inflation accelerates, the Fed gets more aggressive and eventually breaks something. Therefore, we think investors should be both cautious and opportunistic.

Fixed Income

Our year-end target range for the 10-year US Treasury yield is 4.25%–4.75%. As of the end of trading on September 17, the yield was around 4.93%. While we have been advocates for shorter-duration positions for most of the year, we think the risk/reward potential is improving for those seeking to extend duration modestly. History tells us that the median 10-year yield move 12 months after the initial rate hike was +22 bps.
Franklin Templeton Institute Senior Analyst Lukasz Labedzki notes that while 10-year yields have historically risen by a median of 15bps, in each of the six previous cycles the 2s/10s yield curve has flattened, with a median of -87 bps. The curve has already flattened almost 10 bps since the morning of the FOMC announcement.
If you are looking for signs of concern about fundamentals or higher rates, you won’t find them in credit spreads. The Bloomberg US Agg Corporate Option Adjusted Spread (OAS) tightened this week and currently sits at 76 bps. The Bloomberg US Corporate High-Yield OAS spread also remains very well-behaved and currently sits at 269 bps. While these spreads are tight historically, the strong fundamental backdrop and higher starting yield make them attractive, in our view.

Sentiment

The percentage of bullish investors in the latest AAII survey (for the week ending September 16) is 29%, the lowest since the end of March. The percentage of bearish investors in the AAII survey is 53%, the highest since May of last year.
As of Thursday’s close, the S&P 500 Index stood at 2.3% below its all-time high. Many sentiment indicators, including the AAII, suggest we’re still far from euphoria.

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

Source of data (except where noted) is Bloomberg and Franklin Templeton Institute, as of September 17, 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.

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 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. “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.

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

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.

MSCI EAFE Index: Captures large- and mid-cap representation across 21 developed markets countries around the world, excluding the United States and Canada.

MSCI Emerging Markets Index: Captures large- and mid-cap representation across emerging markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country.

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