All of the S&P 500's return this year has come from earnings growth. The multiple the index trades on has gone down, because earnings rose faster than prices did.
That is the opposite of how a market near record highs is usually described. It is also, on Chris Galipeau's account, why the run is not over — and why he is telling clients to expect a rougher ride anyway.
"So, we just got two plus years of S&P returns in five months."
Galipeau spent 25 years as an analyst and equity portfolio manager before joining the Franklin Templeton Institute, and the broadening call he and a colleague published in January 2025 — out of the Magnificent 7 and into small caps, equal weight and emerging markets — is the call this conversation audits.
The full interview is covered here so you can skip it. 35 minutes of audio, 15 minutes of reading.
Here are the 12 takeaways that matter.
👤 Guest: Chris Galipeau, Head Market Strategist at the Franklin Templeton Institute, the firm's research arm, who spent 25 years as an analyst and equity portfolio manager before moving to strategy
🎙️ Host: John Przygocki, of the global marketing organization at Franklin Templeton, who presents the firm's Talking Markets podcast
📰 Published: 16 September 2026 on YouTube (Franklin Templeton) · recorded 1 September 2026
🔴 YouTube | ⏱️ 35 min | ✅ Time saved: 20 min
Key Takeaways
The entire S&P 500 return this year came from earnings growth, and the multiple contracted while the index rose
He puts the correlation between S&P earnings growth and price return since 1950 at 0.95
The broadening call was built on four preconditions, not on valuation
Easy monetary policy, rising earnings estimates, an expanding economy and high index concentration
Cheapness alone never worked for Europe, emerging markets or small caps, and he says so bluntly
What changed in 2025 was the arrival of a catalyst to unlock the discount
The index has delivered more than two years of normal returns in five months, which is itself a reason to expect chop
His single macro tripwire is the ratio of central banks hiking to central banks cutting, which leads earnings by about 14 months
Second-quarter S&P earnings grew in the mid-40s including mark-to-market gains on AI stakes, and about 30% without them
A 10-year yield above 5% held for a while is what he thinks would compress the multiple, not 4.75%
He is telling clients to prepare to buy the pullback, not to avoid it
1. What Broadening Means
Przygocki opened by framing the episode as an audit of the firm's own call, and asked Galipeau to define the term before anything else.
The host's framing is the setup for everything after it: "Since January of 2025, the Franklin Templeton Institute has been making the case that the equity market leadership would broaden beyond the mega cap tech companies commonly referred to as the Magnificent 7." The new paper's claim is that the thesis has been delivered. "But there is a stark warning that investors need to prepare for a more volatile demanding phase."
Galipeau's definition is about who is producing the earnings, not about which stocks are going up. Broadening is the movement away from a handful of names dominating both earnings power and returns, toward many more stocks participating.
"So, you're really moving from almost a one-trick pony to something that is much more participatory. And that's also bullish, by the way."
2. The Four Variables
Przygocki asked what the core conviction was in January 2025, and whether it drew pushback while the Magnificent 7 were still driving everything.
The method was historical rather than forecast-led. The team looked back at every period in US history over the last 50 to 75 years where the data exists, to find what is in place before the market broadens out.
"And there were four variables that we focused in on in no specific order." They were easy monetary policy, with the Fed cutting; earnings estimates being revised higher; an economy that was fine and expanding; and high index concentration. All four were present.
The second input was global forward earnings power, and it is the number that made the case. From 2020 to the end of 2024, the Magnificent 7 drove the lion's share of the S&P 500's earnings growth and virtually all of its performance.
Remove those seven companies and recalculate, he said, and the rest of the index produced almost no earnings growth at all over that period.
That is where the flag went in the ground, on a single premise: "Stock prices follow earnings over time."
The comparison that made the international leg of the call: earnings power outside the US looked better than it had in roughly 15 years, and within the US, by major index, better than at any point since coming out of the pandemic.
3. The Pushback
The reaction from advisers is the part of the story Galipeau tells at most length, and it is a description of how a contrarian allocation call actually lands.
"Now getting push back is an understatement. We got a lot of it." The non-US leg focused on emerging markets, Japan and Europe.
The objection was experience, not analysis. Advisers had held that exposure for a decade or two and it had not worked; clients in meetings were asking why they owned an emerging-market portfolio at all when the US had dominated returns.
His summary of the mood was "once bitten, twice shy." He was explicit that the objection was reasonable: "And I understand their arguments right because for the last 15 years they've been right."
The specific technical objection was about the currency. "There also was this general belief that in order for EM to work, you needed the dollar to weaken significantly."
His answer separated the translation effect from the driver. A weaker dollar helps returns translate, but "The foundational piece that you need is the earnings power."
The US small-cap leg drew the identical response: "Hey this is always just a trade. It never really works."
What he says settles it is empirical data rather than opinion, and his job is to look for "where the puck is probably going to go."
The call was contested all through 2025 and then adopted. "And to be honest, Wall Street got on the call in the first quarter of 26." All his team did at that point was show clients the same data from the fourth quarter of 2024.
4. Where Leadership Came From
In January 2026 the Institute sharpened the thesis to name where the leadership would show up. Przygocki asked for the evidence.
The evidence was compound forward earnings growth for 2025, 2026 and 2027, run at index level. In the United States, the strongest earnings growth for 2026 and 2027 came from the Russell 2000 — core, growth and value alike.
"So all three of those subbuckets of the Russell were in the pole position when it came to earnings growth and we know that is the primary driver."
The second input was positioning, which he described as anecdotal but consistent. From conversations through 2025, the average US adviser was substantially underweight emerging markets, substantially underweight the Russell 2000, and underweight the S&P 400 midcap index.
The scoreboard he read out: small caps and Russell 1000 value are the leaders year to date, and measured from January 2025 the equal-weighted S&P 500 is outperforming the cap-weighted index.
His defense of the approach is that it removes the incentive problem. Building the case on empirical data keeps the team objective, he said, because they have no axe to grind.
Asked whether there was a moment when it was clearly working, he said yes, and dated it to the first quarter of 2025 — while most advisers, on his account, only noticed in the first quarter of 2026.
He named the five fundamentals he was trained to watch as a portfolio manager: revenue growth, earnings growth, EBIT margins, net income and, ultimately, earnings-per-share growth.
The tariff episode of 2025 did not change the call. "We never wavered from the call."
5. Earnings, Not Reversion
Przygocki put the skeptic's case: that this was mean reversion, and the laggards simply caught up because they were cheap.
Galipeau's answer starts by conceding how the cheap case was always sold — own Europe and emerging markets because they are cheap, with supposedly low correlation to the US, which he said is not actually true.
The lesson he says he learned as a portfolio manager: "Stocks can remain cheap for a long time. And just because something is cheap does not mean it's going to work. That's that's a fallacy."
What was different coming into 2025 was the second ingredient. "You have the catalyst to cause these markets that are cheaper on a multiple basis relative to the US, maybe even relative to their own histories, to cause those multiples to go up."
"This was fundamentally driven. This was driven by earnings."
The decomposition is the line the title rests on: "this year 100% of the return in the S&P has been driven by earnings growth. The multiple has actually come down because the earnings power has been so strong." He said that holds broadly around the world, and that reported earnings drove the market in 2025 and are driving it year to date.
The long-run evidence he cited: "If you go back to 1950 and you plot out earnings growth for the S&P over that 75 year period" and compare price return with earnings growth, the correlation comes out at 0.95. Across every index and period the team has run, he said, it is never below 0.80.
His explanation for why investors miss it is the information environment. The negative narrative dominates headlines everywhere, which makes it hard to stay focused on the variables that actually move prices.
6. 2 Years in 5 Months
The new paper's warning is about volatility, and Przygocki asked why a validated broadening thesis leads to more of it rather than less.
The first reason is the size of the move. "So, the S&P is up about 24%. I'm rounding a little bit." His precise figure was 23.74%, measured from the start of the Middle East conflict.
Against a long-run equity return of 8% or 9% a year, "So, we just got two plus years of S&P returns in five months."
The second reason is the earnings cycle itself. "You've also got in some pockets of the market probably peak rate of change in EPS growth." Once that arrives, investors start arguing about whether growth has topped out or has legs to 2030, and the friction between those views produces volatility.
The third is the calendar. "We're also entering into the most volatile months of the year here." September is one of the weakest months of the year, if not the weakest; there is the old adage about the "October massacre" in the first couple of weeks of that month; and midterm years historically run at higher volatility.
He noted how routine pullbacks have been even in a strong year: "And John, quietly this year, there have been four S&P 500 pullbacks between, let's say, 4% and 9%." The 9% one was in March, with the Middle East situation. "It's perfectly normal to get another one."
The instruction attached to the warning is the point of it: expect chop, and be a buyer into it.
7. The Central-Bank Ratio
Przygocki asked about the liquidity signal in the paper, defined as the aggregate stance of the major central banks — easing against tightening.
The construction is deliberately simple: the number of major central banks cutting rates against the number raising them.
The logic is about the cost of capital. A net bias toward raising rates raises the cost of capital and the cost of financing. "That is a very good lead. It's a leading indicator of future earnings growth."
The lag is the number worth writing down. "And so the lead time from central bank activities to the impact on earnings growth is about 14 months."
The reading today is neutral. He described the ratio as essentially unchanged: "It's nothing to worry about here now."
What could change it is the Fed, and he referenced Warsh's remarks the previous week. On market-based pricing of a hike by year end: "It's better than a coin toss chance. The odds just went up a lot here in the last week."
He hedged the forecast — "So, I don't have a crystal ball" — while defending the indicator's predictive power over forward earnings growth.
The trend is what he is watching. More central banks have been cutting than raising over the last 24 months, and that is starting to shift.
8. Three Steps and a Stumble
Galipeau introduced an old Wall Street rule of thumb himself, unprompted, as the thing that would make the central-bank ratio matter.
"The one thing that strikes me as we're talking about this is the old Wall Street adage, three steps and a stumble."
"And so that adage is talking about the Fed raising rates three times or more." At that threshold, problems can occur: "Meaning the Fed takes policy rate into a restrictive stance and we need to be cognizant of that."
He immediately supplied the counter-example, and it is his own recent memory. Coming out of the pandemic the Fed raised rates at an almost unprecedented pace, by size and in a short period, and everyone thought the world was going to end. "There was no recession in 22 and people were guaranteeing that."
So the adage guarantees nothing — not a GDP slowdown and not a recession — but he treats it as a forward indicator of earnings power worth watching.
9. The Earnings Run
Asked what is giving him confidence on earnings — the level of growth or the breadth — his answer was both, and he gave the quarterly numbers.
First-quarter S&P 500 earnings grew roughly 26% to 27% year on year, and the rate accelerated sequentially into the second quarter.
The headline second-quarter figure is inflated by one-off items, and he said so before giving it. Including the mark-to-market gains some Magnificent 7 companies took on holdings in companies like Anthropic and OpenAI, growth accelerated into the mid-40s.
"If I take those one-time items out, it takes the number down to about 30ish. That's still excellent."
"So, and on a reported basis, earnings in the first six months of the year were significantly substantially ahead of street consensus."
He is explicit that this is the peak, not the run rate. "As we move forward, that rate of change is going to slow." Consensus estimates at index level still have earnings growing through the balance of 2026 and into 2027, barring a black swan or the three-steps-and-a-stumble outcome.
On valuation he refused both the cheap and the expensive label. The index is at 19 times next year's earnings, 21 times this year's number, and 16 or 17 times 2028 estimates — which he said is too early to lean on. "Tape's not expensive, right?"
And the strong first half is itself a reason to expect a choppier second half, which he said is fine if an investor is prepared for it.
Przygocki's summary, which Galipeau accepted without qualification: "So it sounds like it's volatility that we could expect that we can endure that it's just a volatility event taking place within a larger bull market and it's not the sign of something more." The answer: "Agree. Agree."
10. What Turns Him Defensive
Asked what would change his view, Galipeau named two things and ranked them.
The primary one is forward earnings growth, because that is the variable prices follow. A dent in it would send him back to the central-bank ratio for the cause, and he said there is no real evidence of a problem there yet.
The second is the long end of the curve, and he said the market is at those levels now. "The other thing that we need to watch for, and we're pushing those levels here now, is higher long rates will put pressure on multiples at some point."
He gave a specific threshold rather than a direction: "Now, I don't really think it's 475 on the 10-year, John, but if we trade north of five and we stay there for a while, the stock market's not going to react well to that."
The distinction he drew is between the earnings stream and the multiple. Higher long rates would not knock earnings offline; they would compress what investors pay for them.
"Remember that the stock market is a discounting mechanism. It looks forward, not backward." That, he said, is why the Institute works from forward earnings power, and he committed to changing the call if the forward picture changes.
11. Discipline Over Emotion
Przygocki asked what a more demanding phase demands in practice — selectivity, active management, patience?
"I think it's all that and I would summarize selectivity maybe active management and patience into one word discipline."
His working definition is a portfolio manager's checklist made portable. Know what you own, know what to add to on weakness, know what to trim on strength, and keep a list of names you do not own or do not own enough of.
The transferable version for an adviser or an individual: know the entry price, know the exit price, know how to manage the portfolio's risk, and keep some diversification.
The insight underneath it inverts how most people experience a rally: as prices rise, "the risk in owning them goes up," because the market is moving ahead of the fundamentals investors believe are coming.
"And the flip side of that is also true that when stock prices come down, you know what else is coming down? The risk in owning them."
The failure mode he described is behavioral and specific. "People start to panic emotionally and they abandon their long-term plan and they lose their discipline. And so it's discipline over emotion."
He pointed out the consolidation has already begun: "Look, the S&P's gone sideways for the last two months. This is already doing it."
12. Prepare the Ship
Asked for the one thing listeners should watch, Galipeau gave an instruction rather than an indicator.
"Prepare for volatility in the next couple of months. That's the first thing." He set it in the context of a bull market with a positive macro backdrop and real things to watch on the Fed.
"Prepare for future volatility. Prepare to put capital to work on any significant pullback."
The historical figure he ended on is the strongest single number in the interview: "Be aware that the third year of the presidential cycle, S&P averages somewhere around 30% return. The hit rate of positive returns is 100%."
"Just prepare the ship for a little bit of a rougher ride."
Bonus Insights
The paper itself is available on Franklin Templeton's website and on Galipeau's own LinkedIn, and advisers can get it from their Franklin Templeton market leader. Przygocki added that listeners can subscribe to Galipeau's weekly newsletter by following him there.
Galipeau's aside about his own incentives is worth keeping, because it explains the framing of the whole conversation. The Institute's clients are financial advisers, and his stated goal is to help them protect capital or make money in an informed way — which is why the call was built from data the clients could be shown rather than from a house view.
He treats correlation between the US and international markets as a live myth. The standard pitch for Europe and emerging markets includes low correlation to the US; he said flatly that correlations are not low.
The clearest statement of his method came in passing, in the pushback section: it is on him and his team to present the empirical data and let that drive the opinion, rather than the other way around.
Galipeau's bottom line is that the broadening trade worked because earnings broadened, not because cheap assets bounced — and that the same framework now says the risk is a volatility event inside a bull market, to be bought rather than avoided, unless the central-bank ratio turns or the 10-year yield settles above 5%.
Products, Companies & Tools Mentioned
Franklin Templeton Institute (The firm's research arm, which published both the January 2025 broadening paper and the new volatility paper this episode discusses)
Anthropic and OpenAI (Named as the holdings whose mark-to-market gains inflated Magnificent 7 earnings in the second quarter)
Books & Resources Mentioned
Get Ready for a Broader US Equity Market (The January 2025 Franklin Templeton Institute paper that made the original call)
The Franklin Templeton Institute's new paper on volatility (The research under discussion, available on Franklin Templeton's site and on Galipeau's LinkedIn)
Watch the full episode:
If this was worth your time, send it to someone who has to have a view on this.
Get the latest market chatter as it happens: