From the US Market Desk: Strong earnings season complete! Where will the market focus now?

• Equities have rallied through a strong earnings season. Markets are now likely to focus on artificial intelligence (AI) capital expenditures, the returns companies are generating on those investments and whether upcoming initial public offerings (IPOs) from SpaceX, OpenAI and Anthropic reinforce the narrative.
• New Federal Reserve (Fed) Chair Kevin Warsh will be watched for any shift in policy direction.

Macro

• Our real gross domestic product growth forecast for 2026 is 2.5%  (based on Franklin Templeton Institute’s Global Investment Management Survey), versus the Fed’s forecast of 2.3% and the Wall Street consensus of around 2%. The main drivers for growth this year will likely be a resilient consumer, fiscal stimulus resulting from the One Big Beautiful Bill Act and strong business investment fueled by the AI buildout.
• Revised data released Thursday showed the US economy grew at a 1.6% pace in the first quarter of 2026, led by business investment and consumer spending.
• New Fed Chair Kevin Warsh faces a difficult backdrop of elevated inflation. Thursday’s April Personal Consumption Expenditure (PCE) inflation report showed that PCE grew 3.8%, and the core rate, excluding food and energy prices, grew 3.3%. Both were in line with estimates but higher than in March.
• Fed funds futures indicate the next Fed move could be an interest-rate hike in 2027. Prior to the US-Iran war, the futures market priced in two cuts. Our base case remains that the Fed stays on hold in the near term. That could change, especially if the conflict in the Middle East escalates or drags on.
• Inflation expectations have continued to ease since the end of March. One-year break-even rates have risen to 2.67%, two-year rates to 2.62%, and 10-year rates to 2.40%. All have moved less than five basis points over the past week.
• The labor market remains healthy, though not especially dynamic. The most recent weekly jobless claims data came in at 215,000, slightly above expectations, and the four-week moving average was 209,000.
• After 90 days of conflict with Iran, oil prices remain elevated. Brent crude is trading around US$95, off its US$115 high but about 35% above its pre-US-Iran war level. If prices move higher or stay high through the rest of the year, the risk to global growth will become more pronounced.

Equities

• We remain constructive on equities and believe that the market will continue to broaden. Small caps, value and emerging markets (EMs) all have the opportunity to outperform. We maintain this call but also see opportunities in growth. After the recent run, we do not think it is wise to chase highs but would use pullbacks to add to the broadening theme.
• Last week (May 22), the S&P 500 Index completed its eighth straight positive week, gaining 17% over that stretch. As of Thursday, the index was on track to complete a ninth straight weekly gain. Over the past 50 years, this is the tenth time the index has posted eight consecutive weekly gains. Only four streaks went beyond eight weeks, with the longest reaching 12 in 1985.

• Historically, average forward returns after eight weeks of positive returns are +3.9% over the next three months, +3.6% over six months, and +11.3% over 12 months. Modest returns in the short term, but strong returns over the next year.
• Since the end of March, the Magnificent Seven (Mag 7, the stocks of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia and Tesla) have led the rally; these seven stocks are up 27% versus 13.3% for the Russell 1000 Value Index and 19.5% for the Russell 2000 Index. But on a year-to-date (YTD) basis, the Mag 7 trails both value and small-cap stocks, with returns of +9%, +13.6% and 18.3%, respectively.
• At this point of the quarter, 96% of S&P 500 companies have reported first quarter earnings and it has been a strong period across most metrics. Per Bloomberg data, 83% of companies beat earnings estimates, with the average beat on earnings-per-share (EPS) being 16.3%. The S&P 500 EPS grew 27% year-over-year, led by information technology, which grew EPS 49%.
• Earnings estimates for the rest of the year have also moved higher. The S&P 500 estimate for 2026 is 9% above where it stood on January 1. At the sector level, technology earnings estimates are up 18%, materials are up 16% and energy up 57%. Higher forward EPS explains much of the equity rally since March.
• EMs, as measured by the MSCI Emerging Markets Index, are up 25% this year, beating the S&P 500 by 14%, after doubling the S&P’s return in 2025. Our constructive view on EMs entering the year rested on strong earnings expectations for EM companies. So far this year, earnings expectations have only increased, with the 2026 estimate now 26% above where it started the year, per Bloomberg data.
• SpaceX has filed its S-1 for a public listing this summer. OpenAI and Anthropic are also expected to go public this year. Investors will scrutinize the financials of these companies as they file registrations to gain greater insight into the path of AI spending and revenues. Per Pitchbook data, SpaceX last raised money in February at a post-money valuation of US$1.25 trillion, OpenAI in March at US$850 billion, and Anthropic on May 28 at US$965 billion. If the companies list near those last valuations, they would rank #9, #14 and #12 within the S&P 500 in terms of market capitalization, respectively. Their financial disclosures and IPO demand could become broader market catalysts, but that could go in either direction.
• Our bottom line: The fundamental backdrop for equities appears strong, particularly for US equities across size and style, and for EMs. We believe it is prudent to reduce concentration, stay diversified, and use consolidation to your advantage.

Fixed income

• The biggest story in fixed income this year has been duration, not credit. That remained true in May as the 10-year Treasury bond yield moved from 4.37% on May 1 to a high of 4.67% on May 19, before settling at 4.45% as of May 28.
• Our expectation that yields stay somewhat higher, with risk to the upside, supports a preference for relatively shorter duration exposure within portfolios. We would not be surprised to see yields remain volatile due to the Middle East conflict and the changing in the guard at the Fed, but we think ultimately yields will hover around 4.5%.
• On the credit side, spreads have tightened over the course of May. Investment-grade (IG) spreads sit at 73 bps as of May 27, down five bps since the start of the month. High-yield (HY) spreads sit at 261 bps, down three bps in May.
• Strong fundamentals, a shorter duration stance, and higher all-in yields make us comfortable owning HY despite tight spreads. HY, as measured by the Bloomberg US Corporate High Yield Index, has outperformed IG, as measured by the Bloomberg US Corporate Index, by 1.2% so far this year.
• We remain bullish on municipal bonds and find tax equivalent yields to be attractive along with robust fundamentals. Importantly, munis can offer diversification benefits relative to most fixed income areas. See more information about our views on muni opportunities today in “Municipal bonds are back.”

Sentiment

• The percentage of bullish investors in the latest AAII Investor Sentiment survey ticked up to 35.6% from 32% last week. The percentage of bearish investors fell to 42% from 44% last week. We see no strong signal here in either direction, but a wall of worry seems to still be in place.
• Remember, bull markets typically peak on euphoria. Despite a strong price rally, sentiment indicates we are a long way from that.
• From the US Market Desk will return with insights again next week.
• Source of data (except where noted) is Bloomberg and Franklin Templeton Institute, as of May 29, 2026. Important data provider notices and terms 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.