Earnings Drive Stock Prices

Equities

• We are constructive on US equities and have established a year-end target range of 7,000–7,400 for the S&P 500, driven by 8%–13% year-over-year (y/y) earnings-per-share (EPS) growth (based on Franklin Templeton Institute’s Global Investment Management Survey). A note of caution here: With the S&P 500’s 15% rip since it reached an Iran-war low in late March, the Relative Strength Index (RSI) on the S&P 500 has risen to 73, up from 28 when the CBOE Volatility Index (VIX) reached 31 and the S&P 500 Index was trading at a low of 6,316. Technical analysts typically view an RSI reading at or above 70 as suggestive of short-term overbought conditions in stocks. I’d expect some consolidation of the market move either in terms of price, time, or both. Finally, we expect volatility to persist until the Strait of Hormuz is open.
• We reiterate our “broadening” call on equities and emphasize our bullish call on small- and mid-cap names in the United States; we also continue to favor emerging market (EM) equities and Japan. Additionally, the risk/reward profile of the Magnificent Seven (Mag 7) names (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla) is more appealing today versus the start of the year. The earnings estimate for the S&P 500 Index now sits at US$331.81, up about US$4 in the last week, and this represents y/y EPS growth of 20%, above the high end of our earlier forecast. Earnings estimates have steadily ticked up all year, and in the long term, earnings drive stock prices—not geopolitics.
• Last week was critical for earnings reports. We heard from Coca-Cola, Pepsi, Caterpillar, Starbucks, Visa, Mastercard, General Motors, Qualcomm, Amazon, Google, Apple, Seagate and Microsoft. Revenue and earnings growth were strong overall, and forward guidance was also strong. The big tech names reinforced the strength of the AI-use trend and the capex spend, as did Caterpillar. The consumer-related names reinforced the commentary from the big banks: The consumer remains resilient.
• Through April 30, 60% of the S&P 500 companies have reported earnings. According to RBC Capital Markets, 72% have beaten revenue estimates, and 81% have beaten earnings estimates.
• Nine of 11 S&P 500 sectors have positive returns year-to-date (YTD), led by energy, up 30%. Eight of 11 S&P 500 sectors are outperforming the S&P 500 YTD with consumer discretionary, financials and health care lagging. All in, I’d call this broad strength, which fits with our broadening call.
• YTD index performance (total return) through the close of April 30 is as follows: The Russell 2000 Value Index, up 15.25%; the Russell 2000 Index, up 13.32%; the S&P MidCap 400 Growth Index, up 12.34%; the S&P MidCap 400 Index, up 10.55%; the Russell 2000 Growth Index, up 11.55%; the Russell 1000 Value Index, up 10.39%, the S&P MidCap 400 Value Index, up 8.67%; the S&P 500 Equal Weight Index (our indicator of the “average stock”) up 6.66%; the S&P 500 Index, up 5.69%; the Russell 1000 Index, up 5.49%, the Russell 1000 Growth Index, up 0.95%, and the Mag 7 basket, up 1.05%. Overseas, the MSCI Latin America Index is up 18.36%, the MSCI Emerging Markets Index is up 14.61%, the MSCI Japan Index is up 10.96% and the MSCI India Index is down 10.54%. Foreign total returns are in US dollars.
• Finally, I have been fielding a lot of questions about equity returns in midterm years. It’s true that midterm years usually have lower equity returns. What is less known is that the third year of the presidential cycle has historically produced the strongest S&P 500 returns. Going back to 1970, the S&P 500 has averaged 17% returns in year three of presidential terms. I would view any significant midterm-related equity weakness as a potential buying opportunity. See our paper “From US concentration to global opportunity” and exhibits 11-13 for historical midterm data.
• According to Citadel Securities, US companies YTD have authorized US$544 billion in stock buybacks. That’s bullish.
• Bottom line: We favor a diversified equity playbook that includes large-, mid- and small-cap exposure in the United States with a balance of growth and value. The same is true for ex-US equity exposure; we believe EM and developed international markets both have attractive outlooks. Our approach: Reduce concentration and spread your bets. Broad strength is your friend.

Fixed income

• We expect US 10-year Treasury bond yields to trade in a range of 4.0% to 4.25% for the rest of the year. These yields are a little above the high end of this range, with yields now at 4.35%. We would consider adding duration risk if yields rise north of 4.50%. The US yield curve has flattened recently, with the two-year–10-year spread at 49 basis points (bps). We expect more bull steepening for the yield curve in 2026, but we are on the wrong side of that call at the moment.
• We expect short-duration fixed income mandates and corporate credit to perform better than cash this year. Considering our views on US 10-year Treasury 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. For now, our approach is to clip coupons.
• Credit spreads have made big moves in the last few weeks. Investment-grade (IG) spreads (one-year/three-year option-adjusted spreads, or OAS) were hovering at 53, essentially flat during last week. High-yield (HY) spreads, as proxied by the Bloomberg US Corporate HY OAS, were 268 bps over Treasuries, four bps tighter on the week.
• Historically, when IG credit spreads trade 200 bps over Treasuries, forward returns for the Bloomberg US Aggregate Bond Index have been positive. Rick Polsinello, Senior Market Strategist-Fixed Income at Franklin Templeton Institute, tells us that when spreads reached those levels, the US Aggregate index has had median forward returns out three months of 1.92%, out six months of 4.19%, out nine months of 4.75% and out 12 months of 3.97%. Spreads are not there, obviously, but if they trade to that level, bonds become more attractive.
• Similarly, when HY credit spreads trade at 600 bps over Treasuries, forward returns have been positive out three months with a median return of 12.82%, out six months with 22.35%, out nine months, with 26.75% and out 12 months with 29.98%. Again, the market is not there, but I would be ready to act if it trades there.
• We are bullish on municipal bonds and find taxable-equivalent yields to be attractive, along with robust fundamentals. Importantly, municipal bonds can offer diversification benefits relative to most fixed income mandates. Consider whether you could benefit from muni exposure in taxable accounts.

Sentiment

• The percentage of bullish investors in the AAII Investor Sentiment survey slid eight ticks this week, to 38%. The percentage of bearish investors in the AAII survey rose six ticks, to 40%. These moves surprised me, considering stock prices are higher—wow!
• Bull markets peak on euphoria. We are a long way from that.

I 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 May 1, 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.

Glossary of terms

• The AAII (American Association of Individual Investors) Sentiment Survey: This survey offers insight into the opinions of individual investors by asking them their thoughts on where the market is heading in the next six months.
• Breakeven rates: The difference between yields of Treasury bonds and TIPS for issues of the same tenor/maturity, calculated by subtracting TIPS yields from Treasuries; a measure of inflation.
• Capital expenditure (capex): Funds that companies spend to acquire, upgrade or maintain physical assets, such as buildings, technology or equipment, with the purpose of maintaining or growing future operations.
• Duration: A measure of how much a bond’s price changes relative to changes in interest rates.
• Federal funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.
• Hit rate: The percentage of positive positions or returns over a specific period.
• Magnificent Seven: Refers to shares of Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla.
• Option-adjusted spread (OAS): Measures the spread between a bond's interest rate and the risk-free rate, while adjusting for any embedded options like callables or mortgage-backed securities.
• Personal Consumption Expenditures (PCE) and core PCE: Measures the price changes in goods and services purchased by US households; core PCE excludes food and energy prices. Both are measures of inflation.
• Relative Strength Index (RSI): A momentum indicator that measures the speed and magnitude of recent security price changes, used in technical stock market analysis.
• Tape: A reference to broad market performance, based on the ticker tape that transmitted stock prices during the 19th and 20th centuries.
• Taxable-equivalent yield: The yield of a municipal bond investment calculated to reflect the benefits of income tax exemption and to be comparable to the yield of a taxable bond.
• U-3 unemployment rate: The official measure used by the US Bureau of Labor Statistics (BLS) to report the percentage of the labor force that is unemployed and actively seeking work.
• Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tight” in reference to spreads indicates small differences in yields.

Indexes

Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.

Bloomberg US Aggregate Bond Index: The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. Please note an investor cannot invest directly in an index.

Bloomberg US Corporate High Yield Index: Tracks the performance of the USD-denominated, high yield, fixed-rate corporate bond market.

MSCI Emerging Markets Index: A free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets.

MSCI Europe Index: A free float-adjusted, market capitalization index that is designed to measure developed market equity performance in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

MSCI India Index: This index is designed to measure the performance of the large- and mid-cap segments of the Indian market. With 64 constituents, the index covers approximately 85% of the Indian equity universe.

MSCI Latin America Index: This index captures large and mid-cap representation across 5 Emerging Markets (EM) countries in Latin America.

Russell 1000® Index: A market capitalization-weighted that measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents the majority of total US market capitalization.

Russell 1000® Growth Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively higher price-to-book ratios and higher forecasted growth rates.

Russell 1000® Value Index: A market capitalization-weighted index that measures the performance of Russell 1000® Index companies with relatively lower price-to-book ratios and lower forecasted growth rates.

Russell 2000® Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

Russell 2000® Growth Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively higher price-to-book ratios and higher forecasted growth rates.

Russell 2000® Value Index: A market capitalization-weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 Index with relatively lower price-to-book ratios and lower forecasted growth rates.

S&P 500® Index (SPX): A market capitalization-weighted index of 500 stocks, a measure of broad US equity market performance.

S&P 500 Equal Weight Index (EWI): The equal-weight version of the S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500, but each company is allocated a fixed weight, or 0.2% of the index total, at each quarterly rebalance.

S&P MidCap 400® Index: A market capitalization-weighted index of 400 stocks of mid-size companies, distinct from the large-cap S&P 500.

The S&P MidCap® 400 Growth Index: An unmanaged, float-adjusted market capitalization-weighted index comprised of stocks from the S&P MidCap 400 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.

The S&P MidCap® 400 Value Index: An unmanaged, float-adjusted market capitalization-weighted index comprised of stocks from the S&P MidCap 400 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.

US Dollar Index: A basket of six foreign currencies (euro, Japanese yen, UK pound sterling, Canadian dollar, Swedish krona, and Swiss franc) used to track the relative strength of the US dollar, with a higher index value representing US dollar strength.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX): A measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce desired results.

Diversification does not guarantee a profit or protect against a loss.

Equity securities are subject to price fluctuation and possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The investment style may become out of favor, which may have a negative impact on performance.

Large-capitalization companies may fall out of favor with investors based on market and economic conditions.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.

WF#: 10231808

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The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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