From the US Market Desk: Panic at the Disco

Get early access. Subscribe to the From the US Market Desk LinkedIn newsletter.

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.

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+% Y/Y earnings-per-share growth. The market is at the low side of the range now and risk/reward is improving. Consensus expectations for 2026 now sit at $369.18, up 13% Y/Y. For 2027, the consensus earnings estimate is $423.54, representing a 15% Y/Y growth rate vs. 2026. Estimates have moved up every single week from Jan 1. This explains the resilience of the tape (see our Global Investment Management Survey for more on earnings and our forecasts).
• The S&P 500 is trading at 20.6x 2026 earnings and 17.5x next year’s estimate. The equal-weight version of the S&P 500 is trading at 17x this year’s number and 16x the earnings estimate for 2027. The “average stock” is not expensive and the equal-weight S&P 500 closed Wednesday at a new all-time high. As a matter of fact, the “average stock” is up 18.17% through the close Wednesday vs. the cap-weighted S&P 500, which was up 13.35% through the close Wednesday.
• There are two main risks to the stock market, in my view. First is the notion of peak rate of change in earnings growth. We are at or near the peak on a rate-of-change basis right now. This does not mean peak nominal earnings power, however, but it does expose investors to higher levels of volatility. Forward earnings power continues to look robust, as mentioned above. The second risk is Fed policy. If we are at the beginning of a protracted rate-hike cycle globally, that will likely put downward pressure on aggregate demand and thus put downward pressure on forward earnings power. Global central banks’ tightening in unison leads earnings power by about 14 months. A protracted hiking cycle is not our base case, but it is a risk to be mindful of.
• We expect the rotation to continue, as we have expected for the past two years. The midterm election results amplified the rotation. Rotation is not a bad thing, and if you are running a diversified equity portfolio, you should be in good shape.
• The VIX is on the move, and we think it makes sense to use heightened levels of volatility to add exposure. A VIX close above 30 would be a good mark to consider beginning to accumulate, while a close above 50 would open the throttles.
• 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. Volatility is your friend.

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.