From the US Market Desk: The Bar Is High—Can Earnings Clear It Again?

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Macro

• Economic growth remains strong, particularly in the United States. Real gross domestic product (GDP) in the first quarter (Q1) grew 2.5% annualized on a quarter-over-quarter (Q/Q) basis and 2.2% in Q2. 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). The Atlanta Fed’s volatile GDPNow (“nowcasting” model) projects 3.6% GDP growth in Q3, as of October 8.
• Second-quarter US growth was driven by consumer spending, which grew at a 5% annualized rate, and business investment. We will get more insight into the state of the consumer next week, when a slew of major banks report quarterly earnings. Two weeks after that, we will start to hear from the hyperscalers and get more information about their spending plans.
• On inflation, data releases were limited this week, but this coming week, the September Consumer Price Index (CPI) data will be reported on Wednesday, October 14. Current market expectations are for CPI to increase 0.6% month-over-month (and 3.6% year-over-year (Y/Y) vs. 3.4% in August) and for the core rate, which excludes food and energy, to increase 0.2% (2.5% Y/Y vs. 2.4% in August). As long as energy prices remain high and conflicts in the Middle East and Ukraine unresolved, inflation will likely be in focus.
• Breakeven rates remain elevated and moved higher across the curve this week. 1-year breakeven rates are 2.9%, 2-year breakevens are 2.57% and 5-year breakevens are 2.41%. These numbers represent the bond markets’ pricing of annualized inflation out one, two, and five years.
• Fed funds futures pricing currently indicates a 17% chance of a hike at the end of October and a 78% chance of a hike in December. Markets expect the Fed to hike once more this year, which is in alignment with the Fed’s median estimate from the SEP. There is disagreement in 2027, however, as futures imply two rate hikes next year vs. none indicated in the SEP.
• We do not expect the September rate hike to be the start of an aggressive hiking cycle like we saw in 1994 and 2022. Historically, the pace and magnitude of hiking cycles have mattered for risk assets. More on that in the equity and fixed income sections below.

Equities

• We remain constructive on US equities (our 2026 S&P 500 target range is 7400-7800, based on our Global Investment Management Survey), with the belief that earnings are driving this market. Earnings have surprised to the upside so far this year and estimates continue to move higher for 2026 and 2027. The bottom-up S&P 500 EPS estimate for 2027 now sits at $420.51, which would represent 14% growth vs. 2026, per Bloomberg data.
• Earnings season unofficially kicks off next week, headlined by the big banks. We will be closely watching and listening to the reports from JP Morgan, Citi, Goldman and Wells Fargo on Tuesday and Bank of America and Morgan Stanley on Wednesday. These reports, along with management commentary on the calls, should provide good information on the state of the US consumer.
• Analyst expectations for Q3 are high, with S&P 500 EPS expected to grow by 29.5%. This number has increased since June 30 when analysts had penciled in 26.7% growth, per FactSet. The upgrade is notable because typically estimates move lower throughout the quarter. FactSet notes that over the past 20 years, bottom-up estimates typically decline by 4.2% during the quarter.
• While high expectations are showing up in earnings estimates, valuation levels for the S&P 500 are not exceptionally high. The forward price-to-earnings ratio for the S&P 500 currently sits at 19x, which is directly in line with the index’s 10-year median. The multiple has actually contracted this year after starting the year near 22x. The 13% rise in the S&P 500 this year has been driven by stronger earnings and increased EPS estimates, not a richening in valuation.
• Even with reasonable valuations and strong fundamentals, there is a reason to believe we are still in a “volatility window.”
• There have been six distinct rate hike periods since the Fed began announcing its policy decisions in 1994. In the three months after the Fed starts hiking rates, the median return has been -3.3%. These periods have also had a median drawdown of 11.4% in the 12 months after the first hike. Returns 12 months after have been positive in five of the six periods, with a median return of 8.1%. The periods with the worst returns were in 1994 and 2022, when the Fed moved most aggressively to raise rates. (Sources: Bloomberg, S&P Dow Jones Indices.)
• Given the strong fundamental backdrop, we believe it is prudent to stay invested in a diversified manner during this volatility window. For those with investable cash, we believe selloffs should be used as opportunities to deploy cash. We see opportunities in the broadening theme, across capitalization size and style in the United States, and in emerging markets.
• The major risks to equity markets, in our view, are twofold: earnings and guidance coming in well below expectations and the Fed changing its policy from a gradual tightening to an aggressive one. The earnings picture will get some more clarity in the coming weeks. Investors will need to keep an eye on inflation data for any indication that the Fed’s tune will change.

Fixed Income

• We expect 10-year US Treasury yields to be in the range of 5% – 5.50% for the balance of the year, based on our survey. We’ve been of the opinion that short-duration bonds and corporate credit would outperform cash this year. We believe the risk-reward of short duration bonds today, where yield levels are above duration, makes them an attractive structural component of fixed income portfolios. With the rise in yields so far this year, intermediate and core bonds are also becoming attractive. For those portfolios able to handle some duration risk, dollar-cost averaging into those areas is worth looking at.
• From a fixed income perspective, during previous periods where the Fed has been hiking rates, core bond returns have been positive. Our Senior Analyst Lukasz Labedzki notes that US core bonds had a median return of 3.6% 12 months after the first rate hike. In four of the six periods, 12-month returns were positive, with the notable exceptions being the aggressive tightening cycles in 1994 and 2022.
• In each of the previous six episodes, the yield curve has flattened three and six months out, and by a median of 21 bps and 37 bps, respectively. Since the hike on September 16, the 2s/10s curve has steepened by 22 bps, driven by the move in the 10-year Treasury yield. If the steepening holds, this would be first time the curve has steepened in the first three months after a hike.
• Implied Treasury volatility, as evidenced by the ICE BofA MOVE Index, remains high. Rate volatility spiked in the past few weeks alongside the move of roughly 30 bps higher in both 10-year and 30-year yields. The increased volatility has coincided with pressure on bond prices. While equities are largely in the green (at least at the index level), many areas of fixed income now have negative returns (with the exception of T-bills, short duration and high-yield). For those looking to tax-loss harvest, we think fixed income is probably the area to do it.
• Spreads in investment-grade and high-yield bonds are still tight from a historical perspective, especially in investment-grade, but we have seen some widening over the past few weeks. Investment-grade spreads sit at 80 bps, up from 75 bps on September 18, but below the five-year median of 94 bps. High-yield spreads have widened to 305 bps, up from 267 bps on September 18, but also below the five-year median of 312 bps. Still-strong fundamentals, coupled with attractive yields, make high-yield attractive, in our opinion.
• We remain bullish on munis. 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, has improved this week. The data released on October 8 shows 40% of respondents were bullish, up from 35% last week. Bearish respondents declined to 39%, down from 46% 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 8, 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.