US stocks are entering the fourth quarter with historically favourable seasonal trends, but rising bond yields, elevated market valuations and growing dependence on massive artificial intelligence spending could challenge further gains, according to a report by Reuters.
The benchmark S&P 500 had gained nearly 13% in 2026 through Friday and was about 1% below its record high reached in mid-August, according to Reuters. Investors now face a packed final quarter, with the third-quarter earnings season, a key Federal Reserve meeting and the November 3 US midterm elections all likely to influence market direction.
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Q4 historically strong for stocks
The fourth quarter has traditionally been the strongest period of the year for US equities. Since 1945, the S&P 500 has posted an average gain of 4.2% during the October-December period and finished higher in 85% of those quarters, according to research firm CFRA, Reuters reported.
Fourth quarters during midterm election years have been even stronger, with the S&P 500 averaging a 6.4% gain as investors typically get greater clarity on the political outlook after the elections.
However, the broader history of midterm years is less encouraging. The S&P 500 has historically experienced an average decline of about 15% during midterm years, according to Wells Fargo Investment Institute, Reuters reported. The index's deepest decline so far in 2026 has been about 9%, leaving investors alert to the possibility of a correction before the election.
A significant shift in control of Congress could also introduce uncertainty around US policy and create pressure on equities, Reuters reported. At the same time, any election-related pullback could potentially create an opportunity for investors to add to positions.
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Rising Treasury yields emerge as key threat
The biggest immediate challenge for equities is the sharp rise in bond yields. The benchmark 10-year US Treasury yield climbed to 5.34% last week, its highest level in 24 years.
Higher yields can make bonds more attractive relative to stocks while also putting pressure on equity valuations. They can raise borrowing costs for companies and consumers, potentially weighing on economic activity and corporate investment.
The report by Reuters stated that the recent rise in yields has been driven by expectations for strong economic growth, higher energy costs that could keep inflation elevated and increased demand for capital as companies raise funds for artificial intelligence-related expansion.
The Federal Reserve's policy outlook will remain closely watched. Minutes from the central bank's latest meeting are due on Wednesday and could provide clues about the path of interest rates, including the possibility of another rate increase later this year.
Following weaker-than-expected US jobs data released on Friday, markets continued to expect the Fed to avoid another immediate rate increase at its upcoming meeting, the report stated.
Earnings expectations set a high bar
The third-quarter earnings season will provide another major test for equities. PepsiCo and Delta Air Lines are among the large companies scheduled to report results this week, with major US banks expected to begin reporting shortly afterward.
Corporate earnings have exceeded already-high expectations this year, helping support the stock market's gains. That strong performance, however, has also raised expectations for the upcoming results.
S&P 500 companies are expected to report earnings growth of more than 30% in the third quarter from a year earlier, according to LSEG IBES data cited by Reuters.
AI spending becomes critical market driver
Investors will be particularly focused on spending plans by major technology companies as they assess whether the huge investment in artificial intelligence infrastructure can continue to support earnings growth.
AI hyperscalers have committed enormous sums to data centres, computing infrastructure and related technology, benefiting semiconductor companies, equipment makers and other parts of the technology supply chain.
The US stock market's performance has become closely tied to the AI theme, making capital expenditure plans from major hyperscalers a key focus of the upcoming earnings season.
Any upward revisions to AI-related capital spending could reinforce the market's bullish narrative. Conversely, signs that companies are becoming more cautious about investment could raise concerns about whether the AI-driven rally can continue at its current pace.
With the S&P 500 already sitting near record highs, investors therefore enter the traditionally strong fourth quarter facing a delicate balance between favourable seasonality and a series of significant macroeconomic and market risks.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
