From the US Market Desk: Bonds. Worth a Look?

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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.
• Next week, we have a handful of economic data points. Most important for the tape—and bond yields—will be the Consumer Price Index (CPI) data on September 11.
• Our core Personal Consumption Expenditures forecast for the year is 3.0%-3.5%. The last reading for July was 3.3%.
• The US two-year Treasury note yield currently sits at 4.32%, about 50 basis points (bps) over the federal funds rate. Remember, the bond market leads the Fed, not the other way around. Two-year yields continue to call for a Fed rate hike. The US 10-year bond yield is currently 4.74%, just off recent intraday highs of 4.81%.    
• Breakeven rates have moved higher, especially the one- and two-year measures. One-year breakeven rates are 2.27%, up from 1.71% at the beginning of August. Two-year breakeven rates are 2.44%, up from 2.19% at the beginning of August. Five-year breakeven rates are 2.37%, up from 2.28% at the beginning of August. These numbers represent the bond markets’ pricing of annualized inflation out one, two, and five years. Breakeven rates and the two-year note are now seemingly giving the same message: Something needs to be done to address inflation. Next week’s CPI data looks large in front of the September 15-16 Fed meeting.
• Meanwhile, the fed funds futures market is indicating there is a 52% chance of a 25-bps hike in September and a 53% chance of a hike in December. The futures market has the 2026 terminal fed funds rate at 3.95%. That’s one 25-bps hike by year-end.
• 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 98.90, still firmly range-bound as it has been for the past 17 months.

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+% year-over-year (Y/Y) earnings-per-share growth. All in, earnings power has been very strong in the first six months of the year. Consensus expectations for 2026 now sit at $365.04, up 11.23% Y/Y. For 2027, the consensus earnings estimate is $413.62, representing a 13% Y/Y growth rate versus 2026. (See our Global Investment Management Survey for more on earnings and our forecasts.)
• If we assume the consensus earnings estimates are reasonably correct, that puts the tape at 21x this year’s earnings and 18.54x 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 18.54x forward multiple is rich either—unless bond yields move significantly higher. We don’t expect that, but that is a risk.   
• Through the end of August, the equity performance leaderboard looks like this: MSCI Emerging Markets Index +24.33%; Russell 2000 Value Index +23.66%; Russell 1000 Value Index +23.09%; MSCI Japan Index +21.17%, Russell 2000 Index +20.19%; S&P 400 MidCap Growth Index +17%; Russell 2000 Growth Index +16.98%, S&P 500 Equal Weight Index +15.57%.  Bringing up the rear is MSCI India -8.32%, Russell 1000 Growth +4.06%, the Magnificent Seven +4.75%; and the MSCI Europe Index +11.82%. The S&P 500 Index is +13.12%. Value over growth. The “average stock” over the cap-weighted index. Broad. Strong. To us, that’s bullish.
• That said, the dispersion is remarkable. Year-to-date (YTD), 206 S&P 500 components (41%) have outperformed the index, while 295 S&P 500 components (59%) have underperformed. YTD, 172 S&P 500 components (34%) are down. In our view, systematic tax-loss harvesting is a must-have tool in your kit. 
• Please take five minutes to read our latest white paper on what to expect from equities in the intermediate term. Market Strategist Lukasz Kalwak and I provide a look at seasonal volatility, midterm election years, liquidity, fundamentals, and what we historically see in the third year of the presidential cycle. Don’t miss this piece: “Broadening Delivered. Now Prepare for Volatility.”
• 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 think buying on pullbacks makes sense.

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 4.75%. We think adding duration risk makes sense around 4.75% or so. Consider dollar-cost averaging into core bond holdings. As you will see in our new white paper from Rick Polsinello and Lukasz Labedzki, the yield that you put money to work correlates with the expected five-year annualized return stream. “Core Bond (Plus): What’s Under the Hood and When to Consider It” is another piece worth your time.
• The US yield curve twisted flatter week-on-week. The two-year/10-year spread is now 41 bps, in from 50 bps in mid-August.
• 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 46 bps over comparable Treasuries. Investment-grade spreads are still only a few basis points from five-year tights. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 264 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 September 2) is 40%, a 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.

We 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 September 3, 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.