From the Market Desk: Steady at the Helm

Macro

Second-quarter gross domestic product (GDP) grew at a 3.8% annualized rate, according to the third estimate.
The most recent core personal consumption expenditures (PCE) index report (for August, released September 26) came in at 2.9%, in line with expectations.
One-year breakeven inflation rates are 2.74%, two-year breakeven rates are 2.65% and five-year breakeven rates are 2.47%. Long-term inflation expectations remain steady in this range.
Where two-year Treasury note yields go, the US Federal Reserve (Fed) follows, historically. As of this writing, the two-year note yields 3.65% (with the effective federal funds rate in the range of 4.0%‒4.25%), suggesting two-ish additional interest-rate cuts are likely at upcoming Fed meetings.
Federal fund futures show an 88% chance of a 25-basis-point (bp) interest-rate cut in October and a 69% chance of a 25-bp cut in December.
The US dollar index (DXY) is about 98 in recent trading. Despite fears of sustained dollar weakness, the dollar has been in a range for the last 5 months.
In sum, the economy appears to remain resilient, and the Fed is cutting rates in the middle of an economic expansion. Historically, such conditions have been bullish for risk assets.

Equities

Our year-end outlook for the S&P 500 Index target range is 6,400‒ 6,800, according to our Global Investment Management Survey, reflecting views of investment professionals across Franklin Templeton.
In late September, a mild pullback has been underway across the board. The S&P 500 is down from recent highs by about 2%, the S&P Mid-Cap 400 Index is off 3%, the Russell 2000 Index is off about 4%, the Nasdaq Composite is off about 3%, the Nasdaq 100 Index (NDX) is off about 2%, and the equal-weight S&P 500 is off about 1%. Bitcoin is off about 13% from its recent high—which we view as a more attractive valuation for prospective investors.
In the last 50 years, there have been eight instances where the Fed resumed cutting interest rates after a pause. We are currently in the ninth instance. In our latest white paper, "How US equities and US fixed income performed with a resumption of Fed easing," Lukasz Kalwak and I found that forward returns for the S&P 500 averaged 17% in similar periods of the past. When the Fed resumes cutting rates after a pause, the Nasdaq Composite Index has led with an average return of 25%. The Russell 2000 has averaged 20%.¹ However, it was not smooth sailing. Our research shows that in the three to four months following a resumption of rate cuts, volatility has emerged.
In speaking with our US clients, we hear that there appears to be a mountain of cash in accounts. Most of the advisors tell us they are waiting for a significant market pullback before investing more of this cash. Our data indicates that market volatility appears likely in the near term, but historically, pullbacks are usually not that deep in periods like the current one—unlike the COVID-19 pandemic and global financial crisis drawdowns. We consider it prudent to be prepared to invest if market prices weaken. It can be helpful to do analysis ahead of time to identify the investments you would favor if they were priced more attractively. We believe volatility can create opportunities for the prepared investor.

Fixed income

The US Treasury 10-year note yield stands at 4.16%, up from 4% a few weeks ago. We have stated over the past few months that we see the target range for yields at 4%‒4.5% for this year (this is also in the Global Investment Management Survey). We maintain that view.
When the Fed has resumed cutting interest rates after a pause, based on our research in our recent white paper, US Treasuries have averaged a 6% return in the following year.²
In the same paper, we describe that the Bloomberg US Aggregate Bond Index has posted an average 8% return³ in the year following the Fed’s resumption of rate cuts rates after a pause.
Looking forward, then, extending the duration profile of fixed-income investments could be beneficial, as it often has been in similar cycles in the past. Watch to see whether yields rise at some point to present a more attractive investment opportunity.
We remain bullish for municipal bonds on a fundamental basis. In our view, the heavy issuance of new supply has been the main challenge holding down muni returns this year. In our view, that supply pressure should start to abate. We believe munis represent an attractive asset class at recent valuations.

Sentiment

The weekly American Association of Individual Investors survey has 42% of respondents in the bullish camp.
That same survey has 39% of respondents in the bearish camp.
Of the surveyed investors, 58% are either neutral or bearish, hence the large cash positions mentioned above.
The wall of worry is still in place, and this is likely to keep pullbacks shallow.

We’ll continue to study the markets and will share new insights next week.

Source of data (except where noted) is Bloomberg as of September 26, 2025. There is no assurance that any forecast, projection or estimate will be realized. An investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at www.franklintempletondatasources.com.

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Endnotes

¹Sources: S&P Global, Russell Investment Group, Nasdaq and Macrobond. Data as of August 18, 2025. 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 or a guarantee of future results.

²Source: Macrobond. Analysis by Franklin Templeton Institute. Data as of August 2025. Pause dates: December 6, 1974; November 2, 1981; July 13, 1990; December 19, 1995; November 6, 2002; June 25, 2003; October 8, 2008; March 4, 2020. Past performance is not an indicator or a guarantee of future results.

³Ibid.

Glossary of terms

AAII Survey: The AAII (American Association of Individual Investors) Sentiment 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 yields for issues of the same tenor/maturity, calculated by subtracting TIPS yields from Treasuries; a measure of inflation.

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.

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.

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.

Commentary about performance of equity categories or investment styles is based on indexes. Large-cap stocks are represented by the S&P 500 Index. Small-cap stocks are represented by the Russell 2000 Index.

Bloomberg US Aggregate Bond Index: Measures the performance of the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities and commercial mortgage-backed securities (agency and nonagency).

Equal-weight S&P 500 Index: This index contains the stocks of the S&P 500 weighted equally rather than by market capitalization.

Nasdaq 100 Index: This index of the 100 largest nonfinancial companies traded on the Nasdaq stock exchange is built with modified market-capitalization adjusted weightings to avoid excessive concentration in the very largest stocks.

Nasdaq Composite Index: A market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange.

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

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

US Dollar Index (DXY): This currency index measures the value of the US dollar relative to a basket of six currencies from other large economies.

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