From the US Market Desk: Approaching oversold

Markets follow fundamentals over time. Yet, in the short term they can be swayed by expectations of the future and changes in those expectations. When markets trade at high valuations, changes in expectations can lead to more pronounced moves. Currently, market fundamentals remain solid, even as some healthy skepticism has entered the fray. We are watching for signals that markets are oversold, or investors have become too bearish. We think we are close to that point.

Macro

• The US economy remains resilient. The November 19 estimate from the Atlanta Fed’s GDPNow model shows 4.2% real growth for the third quarter (Q3).
• The delayed September employment report came out Thursday morning and showed the economy added 119,000 jobs, well above expectations, but unemployment ticked up to 4.4%. This is stale data, but the labor market seems stable, if softening a little.
• The Bureau of Labor Statistics announced it will not release the October employment report and will push back the November report to December 16, the week after the next Federal (Reserve) Open Market Committee (FOMC) meeting. The BLS will also not release the October Consumer Price Index report, and will publish the November report late, on December 18. The FOMC will have limited new data before its next meeting.
• It was a busy week for Fed-speak, as various FOMC members have come out in favor of either cutting or holding interest rates steady in December. This has made fed fund futures pricing volatile for the December decision. Prior to the October 29 FOMC meeting, markets were pricing a 100% chance of a December cut. Fed Chair Powell’s comments at the post-meeting press conference came across as slightly hawkish. After the release of the minutes for that meeting this past Thursday afternoon, futures dipped to show a 28% probability. New York Fed President Williams’ comments Friday morning caused rate-cut expectations to rise again above 65%. With limited new information, expect more of this.
• Inflation expectations have moved lower over the past week, with the two-year breakeven rate moving down from 2.55% to 2.43%.

Equities

• Readers of this newsletter should not be surprised by the recent equity volatility. In our recent paper, “How US equities and US fixed income performed with a resumption of Fed easing,” we pointed out that historically, returns one year out from a resumption of rate cuts have been positive (+17% for the S&P 500). Prior periods have exhibited heightened volatility, with the market on average falling 5% to10% within the first three to six months of the resumption.¹
• The S&P 500 is 5% off the all-time highs achieved on October 29. More speculative areas of the market are in corrections or even bear markets (bitcoin is down 30% since October 29). Market narrative has focused on uncertainty around 1) the amount of Fed rate cuts, 2) concerns on artificial intelligence (AI) capex sustainability and 3) private credit.
• During this recent downturn, fundamentals have beaten expectations. According to Yardeni Research, analysts were expecting 6.5% earnings growth for Q3. With the season all but wrapped up, S&P 500 companies are tracking a near 15% earnings-per-share growth rate, well above expectations. Forward earnings expectations are also increasing, and they are doing so with strong breadth. This is supportive of our case for a broadening in equity markets.
• Valuations have come in as markets have sold off and earnings have increased. The trailing price-to-earnings multiple on the S&P 500 is 24.3x, down from 26.4x a few weeks ago, but still above its 10-year median of 19.7x. The forward multiple has come down to a more reasonable 21.6x, slightly above the 19x multiple that represents the median of the past 30 years.
• We believe markets are now approaching, but not at, oversold levels. The Relative Strength Index (RSI) for the S&P 500 hit a low of 35 after Thursday’s selloff, still above 30, which typically signals oversold. The Russell 2000 Index hit 32. NVIDIA’s strong earnings beat (and guidance raise) initially seemed to soothe markets on Thursday, but the selling pressure kept markets in the red. With the RSI approaching oversold levels, the market may reach selling exhaustion soon. As investors, we think dollar-cost-averaging approach make sense; don’t chase, use weakness.
• With earnings coming in strong and forward earnings increasing, we remain bullish on the fundamentals. The nearly straight-line move higher from April was unsustainable, and we know historically markets are volatile around Fed interest-rate cuts resuming. The fog of limited economic data and an uncertain Fed has led to changing expectations. We favor buying on weakness and prefer having exposure to the broadening of markets.

Fixed income

• Interest rates have exhibited high intra-day volatility since the October FOMC meeting. Treasury 10-year note yields have fluctuated between 4.05% and 4.20% this month. The market is currently at the low end of the range. The two-year note yield has moved lower, and the US yield curve has steepened modestly, with the 10-year-to-two-year spread moving from 48 basis points (bps) on October 29 to 56 bps on November 21. We expect more curve steepening in 2026.
• There was much investor consternation earlier this year about foreign investors potentially shedding US Treasuries. In fact, per Bloomberg reporting, foreign holdings of US Treasuries stand at US$9.25 trillion, just off record highs and much higher than at the start of 2025.²
• Despite fears of a looming credit crisis, we don’t see much evidence of that in corporate bond spreads. Investment-grade spreads have widened two bps over the past week, now sitting at 84 bps over Treasuries. High-yield spreads have widened 11 bps over the past week, rising to 302 bps over. Both measures are well within average spread levels of the past 10 years. We see this as a sign that corporate fundamentals remain healthy.
• We maintain the belief that fixed income will play an important role in portfolio performance moving forward and remain bullish on municipal bonds and higher-quality corporates.

Risk

• After remaining mostly dormant since the end of April, volatility spiked in the past week, with the VIX Index closing at 26 on Thursday. We are watching this closely; levels above 30 typically signal attractive entry points for equities.
• Bitcoin appears to be in a bear market. The cryptocurrency is down 36% from its October high, and other more speculative areas of crypto are down much more. Deleveraging has likely played a role in the steep selloff, with bitcoin at $84,000 at the time of writing. It has now substantially crashed through oversold territory with an RSI of 22.
• The selloff in equities and crypto has not resulted in stronger returns for gold; it is down 8% from its October high but still trades above US$4,000 per oz. Notably, gold was technically overbought (RSI > 70) for most of September and October.

Sentiment

• Investor sentiment remains wary, but we have not seen a bearish move to extreme levels yet. The percentage of bearish respondents in the AAII Investor Survey ticked down from 49% to 44% last week. Bullish respondents increased slightly from 32% to 33%.

We’ll continue to study the markets and will share new insights next week.

Source of data (except where noted) is Bloomberg as of November 21, 2025. There is no assurance that any forecast, projection or estimate will be realized. An investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at www.franklintempletondatasources.com.