Bond Yield Surge, Midterm Uncertainty, Earnings Test Wall Street’s Seasonal Tailwind

U.S. stocks enter the fourth quarter with the calendar on their side, but the pattern of seasonal strength faces headwinds from a spike in bond yields, looming midterm elections, and the start of corporate earnings reports, according to market strategists cited by Economic Times.

The benchmark S&P 500 has gained nearly 13% in 2026 and sits about 1% below its mid-August record high. Since 1945, the index has averaged a 4.2% increase in the fourth quarter, posting gains 85% of the time, research firm CFRA reported. Fourth quarters of midterm election years have historically been even stronger, with an average gain of 6.4%.

“It does tend to be a seasonally strong period, however I think this year investors are facing some headwinds as we go into the fourth quarter,” Tracie McMillion, head of global asset allocation strategy at the Wells Fargo Investment Institute, told Economic Times.

Bond Yields at 24-Year High

The most immediate challenge is the surge in Treasury yields. The benchmark 10-year note hit 5.34% on Thursday, its highest level in 24 years. Yields have risen on expectations of strong economic growth, surging energy costs driving inflation, and increased debt issuance by companies funding AI expansion.

Higher yields weigh on equities by creating competition for investment capital and pressuring valuations. “The interest rate story is the biggest headwind,” Chuck Carlson, chief executive officer at Horizon Investment Services, said in the report. “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, I think is going to be a struggle for the market.”

The Federal Reserve’s policy path is compounding the yield move. The central bank raised interest rates last month for the first time in three years. Minutes from that meeting are due Wednesday and may offer clues on the rate outlook, including the potential for another hike in October or December. After weaker-than-expected jobs data Friday, markets now expect the Fed to hold off on a second straight hike later this month.

Midterm Elections Add Political Risk

Midterm election years historically see the S&P 500 dip an average of 15%, a trend 2026 has defied so far—the deepest pullback this year has been only 9%, according to McMillion. Her firm remains on “high alert” for a selloff before Election Day on Nov. 3, “if it looks like the Democrats can wrest full control of Congress from President Donald Trump’s Republican party.”

A shift in House and Senate control could trigger policy changes that impact markets, she said, but added that any pullback could represent a buying opportunity.

Earnings Season Kicks Off, AI Spend in Focus

Corporate earnings season begins next week with PepsiCo and Delta Air Lines, followed by major banks the week after. S&P 500 companies are expected to report more than 30% earnings growth in the third quarter from a year earlier, according to LSEG IBES data.

Profits have already exceeded lofty expectations this year, propping up the rally, but that has raised the bar for future performance. The market’s performance has been closely tied to the artificial-intelligence theme, according to Nelson Yu, head of equities at AllianceBernstein. He identified “capex revisions from the hyperscalers” as the key metric to watch this earnings season, “because that does kind of start the whole chain.”

Despite the headwinds, CFRA’s Sam Stovall noted that fourth quarters of midterm years tend to benefit from “the lifting of election uncertainty,” as reported by Economic Times. The index’s 6.4% average gain in such periods underscores the potential for a strong finish if the challenges do not derail the rally.