Bond Yields, Midterms, Earnings Challenge US Stocks’ Historic Q4 Strength

US stocks enter the final quarter of 2026 facing a set of headwinds that could undermine the fourth quarter's historical tendency to deliver gains, according to a report from the Economic Times. While the S&P 500 has risen nearly 13% this year and sits about 1% below its mid-August record high, investors are contending with a spike in bond yields, the approach of the November 3 midterm elections, and a corporate earnings season that hinges on massive AI-related spending.

“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,” said Tracie McMillion, head of global asset allocation strategy at the Wells Fargo Investment Institute.

Historical data from research firm CFRA shows the S&P 500 has averaged a 4.2% increase in the fourth quarter since 1945, posting gains 85% of the time. That average rise is more than double the performance of the other three quarters. In midterm election years, the average gain climbs to 6.4%, as stocks “benefit from the lifting of election uncertainty,” CFRA chief investment strategist Sam Stovall said in a note.

Yet the calendar-year pattern has already diverged from history. Midterm years typically see the S&P 500 dip an average of 15%, but the deepest pullback so far in 2026 has been only 9%, according to McMillion. The Wells Fargo institute remains on “high alert” for a decline between now and election day. McMillion cited the possibility that Democrats could win full control of Congress from President Donald Trump’s Republican party.

“If we were to see a change in the leadership in the House and the Senate combined, then we think that that could have some policy ramifications that could impact the markets,” she said, while adding that such a pullback could represent a buying opportunity.

**Spiking Bond Yields Put Pressure on Equities**

The most immediate challenge for stock investors is the sharp rise in bond yields. The benchmark 10-year Treasury yield hit 5.34% on Thursday, its highest level in 24 years. Yields, which move inversely to bond prices, have surged on expectations of strong economic growth, rising energy costs that stoke inflation, and increased competition for capital as companies issue debt to fund AI expansions.

“The interest rate story is the biggest headwind,” said Chuck Carlson, chief executive officer at 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, I think is going to be a struggle for the market.”

Higher yields create competition for equities as an investment, pressure stock valuations, and translate into more expensive borrowing costs across the economy. Investors said the yield surge is already impeding the market’s advance.

The Federal Reserve’s monetary policy path is a key driver of yields. The US central bank raised interest rates last month for the first time in three years, aiming to cool above-target inflation. Minutes from that meeting are due on Wednesday and could offer clues about the Fed’s rate outlook, including the potential for another hike in October or December. Following weaker-than-expected jobs data on Friday, markets maintained bets that the Fed would likely hold off on a second consecutive hike at its meeting later this month.

**Earnings Season Eyes AI Capex**

Corporate earnings season begins in earnest next week, with PepsiCo and Delta Air Lines among the large companies reporting third-quarter results before major banks kick off the broader reporting period. S&P 500 companies overall are expected to have increased earnings by more than 30% in the third quarter from a year earlier, according to LSEG IBES data.

This year, corporate profits have surpassed already-lofty projections, fueling the market’s rally. But that success has raised the bar for continued stellar performance, which could test the market.

A central focus of the earnings season will be spending by AI hyperscalers on infrastructure. Such investment has lifted profits across a wide range of companies, tying stock performance closely to the AI theme.

“As it relates to AI this upcoming earnings season, the number one thing to watch for is capex revisions from the hyperscalers,” said Nelson Yu, head of equities at AllianceBernstein. “Because that does kind of start the whole chain.”

The confluence of rising yields, political uncertainty, and high earnings expectations leaves the fourth quarter’s typical strength in doubt, even as the year-to-date performance remains solid. Investors are watching for signals from the Fed, the election outcome, and corporate spending plans to gauge whether stocks can sustain their advance.