Bond yields and AI spending test US stocks’ strong fourth quarter

US stocks are approaching the final quarter of 2026 with a strong performance already behind them, but investors face several forces that could disrupt the market’s usual year-end momentum. The S&P 500 had risen almost 13% by Friday and remained roughly 1% below the record reached in mid-August, according to reporting by The Economic Times.

The weeks ahead will bring several potential market-moving events: the beginning of the third-quarter earnings season, the Federal Reserve’s next policy decision and the November 3 elections that will determine which party controls Congress. At the same time, the yield on 10-year US government debt has climbed sharply, increasing competition for stocks and raising financing costs for companies.

A favorable season with unusual risks

Historically, the fourth quarter has been the strongest part of the calendar for US equities. CFRA research shows that the S&P 500 has gained an average of 4.2% in the period since 1945, rising in 85% of those years. The typical fourth-quarter advance has been more than twice the average increase recorded in each of the other quarters.

The pattern has been especially favorable during midterm election years. CFRA chief investment strategist Sam Stovall said the S&P 500 has historically produced an average fourth-quarter gain of 6.4% in those years, as uncertainty surrounding the vote tends to ease after the election.

That optimism is tempered by the broader record of midterm years. The index has historically posted an average decline of 15% during those years, according to Tracie McMillion of the Wells Fargo Investment Institute. The worst retreat in 2026 so far has been 9%, meaning the market has avoided much of the volatility associated with the period.

Wells Fargo is watching for a possible decline before election day, particularly if Democrats appear likely to take control of both chambers of Congress from President Donald Trump’s Republicans. A change in congressional leadership could alter the policy outlook and unsettle investors, although McMillion said any resulting fall could also create an opportunity to buy.

Rising borrowing costs put pressure on shares

The sharpest immediate concern is the bond market. The 10-year Treasury yield reached 5.34% on Thursday, its highest point in 24 years. Bond yields move inversely to prices, and the recent increase reflects expectations of firm economic growth, higher energy costs that are adding to inflation and greater demand for funding as companies borrow to expand artificial-intelligence infrastructure.

Higher yields can weigh on equities in several ways. They offer investors a more attractive alternative to shares, reduce the value assigned to future corporate profits and make loans more expensive for households and businesses. Those pressures can be particularly significant when stock valuations are already elevated.

Chuck Carlson, chief executive of Horizon Investment Services, identified interest rates as the market’s main obstacle. In his view, stocks may not suffer a collapse, but a substantial rally will be difficult without some improvement in the rate environment.

The Federal Reserve’s next steps will therefore be closely watched. The central bank raised interest rates last month for the first time in three years as it sought to contain inflation that remained above its target. Minutes from that meeting are due on Wednesday and could indicate whether officials are considering another increase in October or December.

A weaker-than-expected jobs report released Friday caused investors to maintain their expectation that the Fed would avoid a second consecutive increase at its meeting later this month. The minutes may nevertheless provide important clues about how officials view inflation, employment and the economy.

Earnings must justify high expectations

Corporate results offer another test. PepsiCo and Delta Air Lines are among the major companies scheduled to report third-quarter figures next week, with the large banks beginning the broader earnings season the week after.

Profit growth has already helped drive the market higher this year. Companies have exceeded forecasts that were themselves ambitious, but that success has also created a demanding standard for the next set of results. LSEG IBES data indicates that total earnings for S&P 500 companies are expected to be more than 30% higher than a year earlier in the third quarter.

Investors will pay particular attention to the spending plans of the large technology companies building AI infrastructure. Their capital expenditure has supported profits across a wide range of suppliers and helped make the AI theme central to the stock market’s performance.

Nelson Yu, head of equities at AllianceBernstein, said the key issue in the coming reporting season would be whether the major AI companies revise their capital-spending plans. Such changes could affect the many businesses connected to the technology investment cycle.

That dependence leaves the market vulnerable if spending projections weaken, even while headline earnings remain strong. With yields elevated, political uncertainty approaching and expectations for corporate profits already high, the fourth quarter may need more than its usual seasonal pattern to deliver another powerful advance.