
Macro
- Economic growth remains strong in the United States. We expect 2026 real GDP growth to come in at 2.5% (based on our Global Investment Management Survey). That is above the Bloomberg consensus of 2.2% and the 2.3% median response from the Federal Reserve’s (Fed’s) most recent Summary of Economic Projections (SEP), or “dot plot.” The Atlanta Fed’s volatile GDPNow (“nowcasting” model) projects 3.5% real GDP growth in the third quarter (Q3).
- Consumers remain resilient. We have heard this on most earnings calls the past couple of weeks. The main takeaway has been that the consumer is healthy and is supported by a strong labor market, even amid higher gas prices in Q3. Retail sales for September increased 0.8% month-over-month (m/m), versus market expectations of 0.3%, bringing the year-over-year increase to 6.3%.
- Initial jobless claims, reported on Thursday, came in slightly below expectations again, and the four-week average remains below 200,000. This data supports our belief that the labor market remains strong. The September unemployment rate (reported on October 2) was 4.2%.
- Inflation remains hot. Two reports last week came in above expectations. The headline Consumer Price Index rose 0.6% in September, an increase from 0.4% in August and 3.7% year-on-year. The core (excluding food and energy) rose 0.3% and 2.6% annually vs. expectations of 0.2% and 2.5%, respectively. Producer Price Index (PPI) final demand rose 1.3% m/m, its largest increase since March of 2022. The core PPI rose 0.7% vs. 0.3% expected, also the largest in four years.
- The two-year Treasury yield fell 10 basis points (bps) on the week to 4.70%. The 10-year fell below 5% for the first time in nearly a month and now yields 4.99% after falling 9 bps. The yield curve has continued to bull-flatten.
- Fed funds futures have dropped meaningfully. Current pricing implies only a 10% chance that the Fed hikes next week, and an interest-rate hike by the Fed’s last meeting in December is not fully priced in. The market now expects less than three rate hikes over the next year.
- Tech companies have increasingly issued debt to fund their spending plans. Each of these factors may have helped push rates higher over the past year. Changes in the artificial intelligence (AI) spending narrative, even small ones, seem to have repercussions in the bond market.
See more: RIA AI Adoption Is Showing Up in the Filings
Equities
- Some cracks have started to show in areas of the AI trade. Since the start of October, the Nasdaq 100 Index is down more than 4%, the Philadelphia Semiconductor Index (SOX) is down 14%, the neocloud company Coreweave has shed 37%, and the Korean Stock Exchange Index (KOSPI) is down 19%.
- The selloff comes amid questions surrounding the ability of some companies to meet their massive spending commitments over the coming years, their ability to refinance at potentially higher interest rates, and elevated stock prices for AI-related names.
- Readers of this note will know that while we are constructive on equities overall (our S&P 500 target range is 7400-7800, based on our Global Investment Management Survey), we also believe we may currently be in a volatility window. We know that historically, markets have been volatile after the Fed begins a new tightening cycle. The median three-month S&P 500 return after the initial hike in the six previous tightening episodes was -3.3%. Despite each period having a drawdown of at least 7% in the year after the first hike, the median 12-month return was 8.1%. The periods with the worst returns were the ones where the Fed moved most aggressively. We do not believe we are entering an aggressive cycle. All indications are the Fed will be deliberate here, in an attempt to not break something.
- The key theme from our team dating back to January of last year is “broadening.” We believe it is prudent today to stay diversified across size and style in the United States, and that there are opportunities in emerging markets and Japan. Given strong fundamentals in each of these areas, we believe corrections will present opportunities to add exposure to the broadening trade at relatively more attractive valuations.
- Earnings have driven the S&P 500’s 12% rise this year. Earnings estimates have increased while the forward price-to-earnings multiple has contracted from 22x to 20x year-to-date. Q3 earnings kicked off last week with most of the big banks. Reports were mixed on the headlines and showed strength underneath, with banks benefiting from strong capital markets and a resilient consumer.
- The earnings calendar shifted to a cyclicals and industrials theme this week, with major reports coming from aerospace/defense, rail and airline companies. Overall, it was a bit of a mixed bag. Although aerospace/defense and rail reports were mostly positive, airline companies continue to face strong headwinds, mostly due to elevated fuel costs. Next week will be the big one, with a slew of hyperscaler and tech companies reporting, as well as the October Federal Open Market Committee meeting on Wednesday.
- The two major risks we have been flagging for equities are earnings coming in below expectations and the Fed aggressively raising rates. AI capex expectations, while related to earnings, have also come more into focus for equity investors. We repeat our thinking on the current environment: Stay diversified and stay disciplined.
Fixed Income
- The major story in fixed income this week was another roller-coaster move in Treasuries. Rates continued to rally, as tech softened and questions about AI capex contributed to the 10-year Treasury yield’s dip below 5%. Ten-year yields moved another 9 bps lower this week and currently sit at 4.99%. Our expected range for the 10-year Treasury yield by year-end continues to be 5.0% – 5.5%.
- The primary theme from this newsletter this year as it pertains to duration has been to favor ultrashort and short duration mandates. While we believe that short duration should remain an important structural component of bond portfolios, the move higher in rates has made intermediate and core/core-plus strategies relatively more attractive. We maintain that moves higher in yields can be met with dollar-cost averaging into these areas. For those investors looking for tax-loss harvesting opportunities prior to year-end, in our view, fixed income is the area to look. Consider upgrading positions where appropriate.
- Within corporate credit, spreads have continued to widen modestly during the month of October. The Bloomberg US Agg Corporate option-adjusted spread (OAS) has increased 7 bps this month and sits at 87 bps today. The Bloomberg US Corporate High-Yield OAS has increased 27 bps over the same time frame and currently sits at 338 bps, in line with its five-year average OAS of 343 bps. Much of the spread movement in high-yield has come from the lowest rung of the index. Given high starting yields and stable fundamentals, we still find upper-quality high-yield bonds to be attractive.
- We remain bullish on municipal bonds. Fundamentals remain strong and yields on a tax-equivalent basis are attractive. We believe municipal bonds can serve as a diversifier within portfolios due to their relatively low correlation to both equities and other areas of fixed income.
Sentiment
- Investor sentiment, as evidenced by the latest AAII survey, fell slightly this week. The data released on October 21 showed 37% of respondents were bullish, down from 39% last week. Bearish respondents increased to 46%, up from 42% last week. Neither reading shows signs of excess or capitulation.
We will continue to analyze the markets and offer insights again next week.
Source of data (except where noted) is Bloomberg, FactSet and Franklin Templeton Institute, as of October 22, 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.
Dollar-cost averaging: An investment strategy wherein a fixed amount of money is invested at regular intervals, regardless of the market's price. Periodic investment plans do not ensure a profit and do not protect against investment loss in declining markets. Since dollar-cost averaging involves continuous investment in securities regardless of fluctuating price levels of such securities, an investor should consider his/her financial ability to continue purchasing through periods of low price levels.
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.
Fed funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.
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.
Price/earnings (P/E): A ratio calculated by dividing a company’s share price by its earnings per share, a measure of valuation.
Tax-loss harvesting: A strategy of selling securities at a loss to offset capital gains and reduce an investor’s taxable income.
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 Referenced
The Bloomberg US Agg Corporate Index: A broad‐based flagship benchmark for the US investment‐grade, fixed‐rate, taxable bond market.
The Bloomberg US Corporate High-Yield Index: Measures the performance of USD‐denominated, high‐yield, fixed‐rate corporate bonds in the US market.
Nasdaq 100 Index: Tracks 100 of the largest non‐financial companies listed on the Nasdaq Stock Market.
Philadelphia Semiconductor Index (SOX): The SOX is designed to track the performance of a set of companies engaged in the design, distribution, manufacture, and sale of semiconductors. It currently contains 30 securities.
Korean Composite Stock Exchange Index (KOSPI): South Korea’s primary stock market index, the KOSPI tracks the performance of the 200 largest companies listed on the Korean Exchange.
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.
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.
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.
Important Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
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