Transcript
Host: Welcome to Talking Markets with Franklin Templeton. We’re here in the studio today with Chris Galipeau, senior market strategist from the Franklin Templeton Institute. The Institute is a research-centric organization at Franklin Templeton focused on trends, opportunities and risks in the global capital markets.
Chris, we’re just three weeks into the new year. So much is already happening in the capital markets. What an exciting time. I’d like to start our conversation today with an update on the Franklin Templeton Global Investment Management Survey. And then hopefully, if we have time, we can turn to your view on the US equity market.
So Chris, who does the Institute survey?
Chris Galipeau: Okay. So there are a handful of us that coordinate the survey. And this is a practice we brought over from our time at Putnam. But it’s probably half a dozen people, maybe a few more that work on the survey collectively from the start, when we ask the questions or develop the questions, right through to collecting and analyzing all the information that comes in.
Host: How often does this process take place over the course of a calendar year?
Chris Galipeau: Yep. So, the plan is and what we’ve done here in the first year is, we execute the survey twice a year. So, we do one round in November. I think of it as the first round because we’re getting ready for the next year. So we do a round of it in November. And then we’re asking at that point what the portfolio managers across all asset classes are thinking about for the coming forward year. So, for example, in November of ‘24, we were asking the PMs for their views and opinions and thoughts on calendar year 2025.
And then by just the methodology that we use, we will then ask them the exact same questions again in May or June. We want to know if anything has changed, and that usually gives us enough information and great insight into what the actual folks running the money are thinking about, what’s important to them, so on and so forth.
And unless anything drastic changes in the economy, in any market anywhere in the world, their opinions really don’t change.
Host: So, then what’s the goal of the production of the survey?
Chris Galipeau: So, the goal is simple. Think of it this way. If you and I are Franklin Templeton shareholders, whether that’s the financial advisors or their end clients, the goal of the survey is to capture all of the thoughts across our investment teams and be able to provide a synopsis, a summation of the highest conviction ideas from Franklin Templeton’s portfolio managers and be able to put that in the hands of the financial advisors who are probably using Franklin Templeton products. So the goal is not for me to tell them what I think about equities, for example. The goal is to let them know what the 200 equity portfolio managers of Franklin Templeton think about equities.
Host: Now let’s cover the results and the expectations that the portfolio managers at Franklin Templeton have for 2025. Can you provide some of your key takeaways? Let’s start with the global economy.
Chris Galipeau: Okay, sure. So, every portfolio manager in the organization is asked about the macro backdrop, i.e. the economy. So they’re an equity portfolio manager or fixed income portfolio manager, a multi-asset portfolio manager. They all get the same questions.
So, what came out of the survey in November, as we were trying to harness their thoughts for 2025, are as follows. First, with regard to the economy in the United States, they’re expecting the economy to remain robust. They’re expecting real GDP to be somewhere in the range of around 2.5 [percent]. So that’s the first thing, right? And that compares with the Fed’s own forecast of 2 and the Street consensus a little higher than that to 2, 2.1. So, our internal forecast for the economy is stronger than consensus and stronger than the Fed. And I think that’s the first piece of information.
The second piece that is interesting is their thoughts around core inflation. So, our best guess here for the year is for core inflation to remain somewhere around 2.75%, which is about where it is today. So we think it has been sticky for the last six months or so. And it probably remains in this range. That is above the Fed’s most recent guidance of 2.2. Their target, of course, is 2. And that’s also above the Street. So we think the economy will be stronger than most. We think inflation will be a little stickier than most.
And then the final part really is centered on what we expect from Fed policy. And of course the Fed has cut by 100 basis points last year in 2024. Our best guess is they’ll probably pull the reins in a little bit, watch the data come in. We’re thinking one, maybe two cuts through the course of 2025. And that’s pretty much in line with the Fed’s most recent guidance in their summary of economic projection data set that they gave us in December.
When it comes to the final piece of the puzzle here, is our expectations around 10-year bond yields in the United States. So, our fixed income PMs [portfolio managers] gave us the range of 4, 4.5 [percent]. Of course, we’re a little higher than that now, but we think rates will probably back down into that range here. And these figures are for the entire year. So for the bond yield target for example, that’s our best guess for year-end 2025 levels.
Host: And so, with this view of the economic landscape, what’s the consensus view of the FT portfolio managers for US equities? And maybe you could also cover any other, you know, geographical areas or countries where they see opportunity.
Chris Galipeau: So, if we start in the United States, I ask the equity PMs to give us a range. It’s very hard to give a point forecast, so I ask them for a range. The range, the most common range that the equity PMs gave us for this year, for the S&P 500 [Index] is 6400 on the low side to 6800 on the high side. And so that’s the first thing. I think probably more interesting and more relevant to all of our clients is what we really think is likely to happen under the surface.
And so, I found it interesting that for the first time in a number of years, the equity portfolio managers were bullish small cap and mid-cap space. They were bullish on the value space and maintain their constructive outlook on the growth space. But very clearly what they were intimating to us was they expect the stock market to broaden out in 2025.
And so, I think that’s probably more important than the target let’s say for the S&P 500, because we think a lot of the action will come away from the S&P 500 as we move through 2025.
Outside of the US, to answer your question, equity PMs were bullish India and bullish Japan. And they had that same position coming into 2024 as well. And so we maintain that stance.
Host: How about any concerns or risks that might be out there on the horizon?
Chris Galipeau: Geopolitics is one that always comes up as a pretty common answer. And of course we know what’s happening around the world in the Middle East, Russia, Ukraine, etc. And the reality is in the 33 years I’ve been in the equity business, the geopolitical answer is very common, right? Geopolitical risk seems omnipresent. The reality is, even though we have concerns there, we’re not probably going to change portfolios in a significant way as a result of that. But nonetheless, that was a very common concern coming into the year.
The other two concerns were the notion that the S&P 500, again back to the index, trades about 22 times this year’s earnings. That’s a big number. And that the bar might be high for earnings. So, I think there is some risk if earnings fall short of expectations. And then the second one for equities would be 10-year bond yields moving substantially higher than they are today. So with a multiple of 22, and even if earnings are in line with consensus, it will be hard to have any multiple expansion from here if rates rise. So I think it’s those three things geopolitics earnings below expectations and 10-year yields are probably the biggest risks.
Host: That’s great. Now you just mentioned 10-year yields. Let’s transition to the Franklin Templeton portfolio managers’ perspective on the fixed income marketplace.
Chris Galipeau: Okay, good pivot. So, coming into the year here this year, the fixed income PMs are bullish on fixed income products (I guess, maybe, or mandates) that have a little bit shorter of duration.
So, if we think about what we’ve seen from the Fed (i.e. 100 basis points in cuts here already), coupled with the expectation for 2025 that maybe we get one or two, then if we’re right on that (and I think they probably are), then the big move down in short rates, the policy rate and cash rates, we’ve seen 80% of the move down probably.
So, mandates that have let’s say one to three years of duration, we think, look very good, right? The credit quality is excellent. And we like that duration tailwind as well. So that’s the first thing. Bullish on shorter duration fixed income in 2025.
In addition to that they were bullish on the high yield space. And, of course, we know that both in investment grade space and high yield space that spreads are essentially at 10-year tights here. The thought is that we probably won’t see substantial spread widening unless the economy has a real problem, which is not our base case. That’s the first thing. The second thing with regard to high yield is the credit quality of high yield today is vastly improved from, let’s say, ten years ago and certainly longer, where they’re much higher quality companies in the high yield space. And so the fundamentals there are very good. Less duration in high yield space as well. And then probably the most important argument there is (you know, the health of the economy looks very good. The credit quality looks good.) is the all-in yield capture from high yield space, right, which is mid-to-high single digits. And we think you’re being compensated very well for having exposure there.
And then the final thing that they were bullish on were muni bonds again in 2025. And they had the same view coming into 2024. And the thought process there is, bullish on the fundamentals, bullish on taxable equivalent yields of muni bonds, so on and so forth. So, shorter duration fixed, barbelled with some high yield and bullish munis.
Host: Chris, I think I’d be remiss if I didn’t ask you about—you know, you’ve covered equities. You’ve covered fixed income. Does this survey cover private markets or what people commonly refer to as alternative investments and some opportunities that Franklin Templeton sees there?
Chris Galipeau: We do. And so, for the listeners, you might not know this, but Franklin Templeton is, you know, a top 10 alternatives manager on the planet. And so we have great depth and breadth in expertise in the alternative space. As we walk into 2025, the areas we’re most bullish on in the alt space would be private equity, specifically secondaries. Bullish on private real estate and bullish on commercial real estate debt. And you talk about a space that got a lot of airtime and some hair on it.
But the valuations have come down substantially there. And we think the risk-reward looks very good. And you know you get banks out of the lending business a little bit in that space. And so we think the opportunity set looks very, very attractive on a go- forward basis.
Host: So Chris thank you for the overview of the Franklin Templeton Global Investment Management Survey. To our listeners, the full survey report is available on franklintempleton.com. I think we have some additional time here. So if it’s okay with you, I’d like to transition and focus on the Institute’s view of US equities. You’ve recently published a paper entitled “Get Ready for a Broader Market.” So I think there’s clearly something that you’ve got to say there. Can we cover some of your key points?
Chris Galipeau: Yeah, sure. And this is what I was referencing earlier when we talked, when we spoke to equities in general. So we did just publish this paper this week. I think this paper is a very good read with a lot of good information in there. Then I think the key takeaways really are as follows, that the variables that normally precede or coincide with the stock market broadening out are in place.
And so there are four of them. And here they are. Lower interest rates. So the Fed cutting rates. And probably that means a global rate-cut cycle, which is essentially true with the exception of Japan, along with higher rates of liquidity that is in place. GDP recovering and accelerating is also very important. Certainly we saw GDP accelerate right through 2024. We think it maintains that level and maybe ticks up a little bit in 2025. So that is in place. And this is critical. Accelerating earnings per share growth rates. So forward earnings growth calendar year ‘25 and calendar year ‘26 looks very good. It is much broader than we have seen in the last few years. And I think that’s probably the most critical variable to have in place here.
And then, finally, normally the market when it goes through a period of having high index concentration, i.e. the Mag Seven[1] names in the S&P [500 Index] right now, that when earnings breadth improves and spreads out, that we’re probably going to work away from the high level of index concentration that we’ve seen. And so all in I think the variables are in place here for the stock market to broaden out. And frankly, this is already happening. This has been an ongoing thing very quietly under the surface since about the first of July of last year. So we’re six months into this and, look, there’s been some ebb and flow to it, and there’s going to continue to be ebb and flow to it. But the market right now as we’re talking is already much broader in the last six months than we’ve seen in the last two or three years, certainly.
And we think that’s going to continue because the variables are in place for it to continue. So, if history is any guide and it usually is, that’s probably the most important call we have in equity space for the year.
Host: So the four variables are—essentially a foundation has been set and you’ve stated that it is there. Is there a need for an additional catalyst or are we just ready to move forward?
Chris Galipeau: I think we’re ready to move forward. And again, the market is already started to sniff this out where small cap stocks that perform well. Mid-cap stocks have performed well relative to the larger cap names that have LED. Value has performed well relative to growth. The equal weight S&P [500] has performed very well relative to the cap-weighted S&P [500].
So I think what’s in motion already the pieces of the puzzle are in place there already. And I think the most critical part here, the most critical part, or the piece, of the puzzle, is for corporate earnings to show their strength as we move through 2025.
Host: Corporate earnings are key, and we’re essentially just now entering into all of the earnings releases from Q4. So it sounds like the next two, three or four weeks are going to be really critical to setting our course. You mentioned small-cap, mid-cap. So I can clearly see alignment with what you’re focusing on in the piece on this broader market opening up and what the Franklin Templeton portfolio managers stated in the survey. Is there anything else that that you wanted to highlight relative to maybe unique opportunities, or have we covered it all?
Chris Galipeau: I think we’ve covered the lion’s share of it. I think the one interesting piece that we haven’t touched on yet—and so our team probably did 500 or so individual meetings with financial advisors across the United States last year in conjunction with Franklin Templeton’s distribution teams. And when we started to talk about and just let advisors know, especially from July on through the end of the year, that we thought the stock market would broaden out, that it actually was broadening out, the sentiment toward mid-cap and small cap names, for example, is so negative. And there’s a good reason for that. Those names have not really participated in the last (you can stretch it out if you want to) five, 10, 15 years. They’ve underperformed large caps for a long period of time. So advisors and clients really don’t seem to have a lot of exposure in the space.
And so I think that’s really interesting, right? So if the earnings picture is accurate (we believe it is) and that comes to fruition, there should be some reasonable ground to be made up here. And there’s not a lot of people that have—(based on conversations and meetings that we’ve had in person) there doesn’t seem to be a lot of exposure on there. And so the need to increase exposure, I think, is there. And, you know, hopefully they get a chance to read this research, which is objective and empirically based. It’s the data. It’s not my opinion necessarily, but it does line up really well with what the PMs told us. The pieces of the puzzle seem to be there and the sentiment toward the space is extremely negative.
And frankly, I could say the same for value as a style relative to growth, where growth has dominated certainly from the middle of 2022 right through calendar year 2024, for very good reason. That’s where all the earnings growth was. Now the earnings picture looks broader and stronger than it has in the last couple of years. And I think that part of the story is critical.
Host: So Chris, we’ve covered a lot of ground here today, both with the Global Investment Management Survey and then with your latest piece. Any closing thoughts for our listeners?
Chris Galipeau: Sure. I would expect as we move through ‘25 with Trump 2.0, to expect a lot of talk that may create volatility. We want to watch earnings roll in (knock on wood, so far so good) in Q4. Guidance for 2025 looks at the margin pretty good. And it’s broad. I would use any reasonable pullback in equities especially if we get that in mid-cap and small cap space like we did from the middle of December through the first couple weeks of January as an opportunity to increase exposure there. I think that’s something to just keep top of mind here as we move forward.
Host: Thank you for your valuable insight and perspective here today. I can’t wait, to be honest, for our next conversation. I’m sure that with all of the activity happening in the capital markets, we’re going to have a lot to talk about as we move forward here in 2025. To all of our listeners, thank you for spending your valuable time with us.
For today’s update, you can check out Franklin Templeton Global Investment Management Survey and Chris’s new thought leadership at franklintempleton.com/insights. If you’d like to hear more Talking Markets with Franklin Templeton, visit our archive of previous episodes and subscribe on Apple Podcasts, Google Podcasts, Spotify or just about any other major podcast provider.
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Survey methodology
Bi-annual survey: This bi-annual outlook survey is designed to give a view across our investment teams. The Franklin Templeton Institute identifies the median across answers and develops commentary on the year ahead.
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1. The “Magnificent Seven” are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
