Froth Coming Out. Tape Remains Resilient.

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) EPS growth. First-quarter earnings exceeded consensus expectations, which have served to drive the S&P 500’s 2026 earnings estimate to $344 today, up from $308 at the start of the year. (See Franklin Templeton Institute’s Global Investment Management Survey for more on earnings and our forecasts.)
• You hear me say repeatedly that stock prices follow earnings. Consider this: S&P 500 earnings estimates are up 12% year-to-date (YTD). The S&P 500 Index is up 11% YTD. Coincidence? I think not. Keep reading.
• Speaking of earnings, let’s look at where the consensus stands for the second quarter (Q2). According to FactSet, expectations are for revenue growth of 12% Y/Y, with all 11 S&P GIC sectors participating in positive growth. Earnings growth of 23% Y/Y is expected, with 10 of 11 S&P GIC sectors in the positive column. EBIT margins are 14% Y/Y. During Q2, earnings estimates have moved up. Typically, Q2 estimates would move down. Not this time. Earnings estimates have been revised higher by 3% vs -2% on average over the last five years, and -3% on average over the last 10 years. Energy, tech and materials lead the EPS charge.
• The earnings picture continues to look very robust, and multiples reflect that fact. The price-earnings (P/E) multiple on the S&P 500 is 21.9x, with the tape at 7550. The P/E multiple was 22.5x on January 1, with the tape at 6850. Much like in 2025, earnings have been driving the move, not multiples. The big banks reported very strong earnings last week, and I suspect earnings season to have a positive tone overall.
• Over the past month I have written about my concern in the semiconductor space. No argument with the fundamentals; rather, my issue was the parabolic nature of the moves. The Philadelphia Semiconductor Index quickly declined about 19% peak to trough (off the highs in late June). The damage is worse at the stock level. Western Digital fell 41%, Sandisk fell 38%, Micron Technology fell 32% and Applied Materials fell 24%. You get the picture. The froth is coming out, and I think that is good news. Despite this violent rotation, the S&P 500 is still within 50 bps of its all-time high. Rotation, not detonation.
• At the same time, money has found its way back to the Mag Seven basket. A few weeks ago, in our note titled, “Rotation Nation. Large Cap Growth on Sale,” we observed that the Mag Seven stocks, collectively, were trading well below their 10-year median forward multiples. That told me much of the bad news was likely priced into those names. Valuation is usually a lousy timing tool, but it is helpful to use when trying to assess risk/reward. We thought it was a good time to buy, and since June 26, the Mag Seven basket (based on the Bloomberg Mag 7 Total Return Index) is up 9.95% and the Russell 1000 Growth Index is up 1.76%. The S&P 500 Index is up 2.49%.
• 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. Large-cap growth is on sale here. The same can be said for ex-US equity exposure; emerging markets and Japanese stocks look attractive. We think it’s prudent to reduce concentration and spread one’s bets. Consider using any further consolidation to your advantage.

Fixed Income

• We expect the 10-year US Treasury bond yield in the range of 4.25% - 4.75% for the year. As of this writing, the last trade was 4.56%. We think duration risk is attractive over 4.75%.
• The US yield curve has widened a bit in the last two weeks. The 2-year/10-year spread is now 40 bps.
• 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 have made big moves (tightening) in the last two months. Investment-grade (IG) spreads, as proxied by the Bloomberg US Corporate 1-3 year Option-Adjusted Spread (OAS), are now 47 bps over comparable Treasuries. IG spreads are a few basis points from five-year tights. High-yield spreads, as proxied by the Bloomberg US Corporate HY OAS, are now 266 bps over, up a touch on the week.
• 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 relative to most taxable fixed income mandates. Consider using some cash to add muni exposure in taxable accounts. Have a read of our latest piece on municipal bonds, “Municipal bonds are back.”

Sentiment

• The percentage of bullish investors in the latest AAII survey is 45%. The percentage of bearish investors is 33%. No signal here that I see. The wall of worry is still in place.
• Bull markets peak on euphoria. I don’t think we are there yet.

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 July 16, 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.

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.

Earnings per share (EPS): The portion of a company's profit allocated to each outstanding share of common stock. An index EPS is an aggregation of the EPS of its component companies.

EBIT: Earnings before interest and taxes.

Fed funds (FF) rate: The interest rate that depository institutions such as banks charge other institutions for holding overnight reserves.

Global Industry Classification Standard (GICS®): Developed in 1999 by S&P Dow Jones Indices and MSCI, GICS was designed in response to the global financial community’s need for accurate, complete and standard industry definitions.

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 callable or mortgage-backed securities.

Relative Strength Index: A momentum indicator that measures the speed and magnitude of recent security price changes, used in technical market

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.

Yield spreads/tights: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Tights” 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 Mag 7 Total Return Index: An equal-dollar weighted equity benchmark tracking a fixed basket of seven widely traded US companies representing the communications, consumer Discretionary and technology sectors as defined by Bloomberg’s Industry Classification System.

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

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.

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

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.

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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.

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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.

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