Macro
- Our real gross domestic product (GDP) forecast for 2026 is 2.5% (based on our Global Investment Management Survey) vs. the Federal Reserve’s (Fed's) new forecast of 2.4% and the Wall Street consensus of around 2%. Third quarter (Q3) year-over-year (Y/Y) GDP came in at 3.4% vs. market expectations of 3.2%. The economy remains resilient. The biggest risk to this strong economic backdrop is Fed policy going forward; meaning, the Fed signals the beginning of a prolonged rate-hike cycle. Raising the cost of capital or tighter financial conditions in general (happening now with higher yields) could have a negative impact on the pace of growth. Stay tuned—but in our view, this is not a replay of 2022 in terms of what we expect from the Fed.
- The Bureau of Labor Statistics just released Q3 productivity stats, which track the total output produced with a given input of labor. The latest data showed Q3 productivity at 3.6%, which was well ahead of consensus expectations of 2.7%. Additionally, the prior data point on productivity was revised higher to 2.1% from the initial report of 1.4%. Could this be AI-driven?
- The US 2-year Treasury note yield is 4.46%, 46 basis points (bps) over the fed funds rate. Remember, the bond market leads the Fed, not the other way around. Two-year yields continue to call for additional rate hikes. We expect one additional rate hike this year. The US 10-year bond yield is currently 4.83%. Rates are well off their October 7 intraday high of 5.36.%. The 2-10 curve has flattened to 29 bps as of this writing.
- Breakeven rates have come off the boil and are slightly elevated vs. the Fed’s 2% inflation target. One-year breakeven rates are 2.11%, 2-year breakeven rates are 2.25%, 5-year breakeven rates are 2.30% and 10-year breakeven rates are 2.25%. These numbers represent the bond market’s pricing of annualized inflation out one, two and five years. Breakeven rates have moved down significantly across all tenors.
- Meanwhile, the fed funds futures market is indicating a 67% chance of a 25-bps hike in December. The futures market has the 2026 terminal fed funds rate at 4.05%—it believes another hike is coming. We agree and it looks like December. Looking at 2027, there is a 44% chance of a rate hike in March. All other months show less than a 50% chance of a rate hike at this point.
- 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 (DXY) is trading at 102, still firmly range-bound as it has been for the past 17 months, but is testing the upper end of that range now. I would note that the DXY has been a consensus short for the last few years, although that has not been our call.
See more: What Is a Stock Really Worth? Understanding Fair Value with FAST Graphs
Fixed Income
- We expect 10-year US Treasury bonds to yield in the range of 5.00%–5.50% for the balance of the year. As of this writing, the last trade was 4.83%. We have shifted our range higher. Franklin Templeton Fixed Income CIO Sonal Desai is of the mind that we are in a higher-for-longer yield regime. When Sonal talks, I listen. Have a game plan to use higher yields to your advantage. Current yield levels generally approximate the forward five-year annualized return stream. The risk/reward is improving with higher yields. We believe a dollar-cost-averaging approach makes sense on ugly days (higher yields with special attention north of 5.50%).
- We expect short duration fixed income mandates and corporate credit to outperform cash again this year. All-in yield capture seems to be the play. To that end, investors might consider high-yield exposure to boost total return as a barbell with short duration exposure and core bond exposure. High-yield is the only subsector of fixed income where the coupon is significantly higher than duration risk.
- 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 58 bps over comparable Treasuries. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 324 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 (and improving), 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.
Sentiment
- The percentage of bullish investors in the latest AAII survey (the week ending November 4) is 34%, a low reading. The capitulation level is around 20%-25% bulls. The percentage of bearish investors in the AAII survey is 48%. The wall of worry is still in place.
- Bull markets peak on euphoria. I don’t think we are there yet.
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 November 5, 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.
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.
Cboe Market Volatility Index (VIX): Measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Often called the “fear gauge,” lower readings suggest a perceived low-risk environment, while higher readings suggest a period of higher volatility.
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.
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?
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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.
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