As the fourth quarter begins, U.S. equities have posted a robust start to 2026, with the S&P 500 up about 12% and the Nasdaq up more than 15% year‑to‑date. Historically, the fourth quarter delivers the strongest seasonal gains, averaging a 4.2% rise for the S&P 500 and posting gains in 85% of quarters since 1945.
Midterm elections add a political variable
While the seasonal trend is positive, analysts note that the November 3 midterm elections could introduce volatility. “If we were to see a change in the leadership in the House and the Senate combined, then we think that could have some policy ramifications that could impact the markets,” said Tracie McMillion, head of global asset allocation strategy at the Wells Fargo Investment Institute. A shift in congressional control away from President Donald Trump’s Republican Party could prompt a market pullback, though she added that such a dip might present buying opportunities.
Bond yields surge to 24‑year highs
The most immediate headwind is the jump in bond yields. The benchmark 10‑year Treasury yield reached 5.34%, its highest level in 24 years. Higher yields increase borrowing costs for companies and can compress equity valuations, creating competition for capital as firms fund AI expansion projects.
“The interest rate story is the biggest headwind,” said Chuck Carlson, CEO of Horizon Investment Services. “You’re going to need some relief on that front. I don’t necessarily think the market will tank per se, but to get a meaningful rally in the face of that, it’s going to be a struggle.”
Fed policy and upcoming minutes
The Federal Reserve recently raised rates for the first time in three years, aiming to curb inflation that remains above target. Minutes from that meeting, due Wednesday, could signal whether another hike is likely in October or December, further influencing market expectations.
Earnings season and AI spending
Corporate earnings are set to begin next week, with major names such as PepsiCo and Delta Air Lines reporting before banks kick off the broader season. Analysts expect S&P 500 companies to post over 30% earnings growth in the third quarter year‑over‑year, driven in part by massive AI‑related capital expenditures.
“The number one thing to watch for is capex revisions from the hyperscalers,” said Nelson Yu, head of equities at AllianceBernstein. “Because that kind of spending starts the whole chain of profit growth across the market.”
Overall, while the seasonal trend remains favorable, investors must navigate the dual challenges of soaring bond yields and the political uncertainty surrounding the midterm elections.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
