US Stocks Face Bond Yield and AI Spending Risks in Fourth Quarter

US stocks are entering a historically strong part of the year, but rising bond yields, heavy AI investment and political uncertainty could test the market’s momentum.

The S&P 500 had gained nearly 13% in 2026 as of Friday. The index was also about 1% below its record high from mid-August, according to Reuters.

Investors now face several major events. The third-quarter earnings season is approaching, while the Federal Reserve is due to meet in the coming weeks. The November 3 midterm elections will also determine control of the US Congress.

“It does tend to be a seasonally strong period,” said Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute. However, she warned that investors face several headwinds this year.

Fourth Quarter Usually Supports Stocks

Historical data has generally favoured US equities during the final three months of the year.

The S&P 500 has gained an average of 4.2% during fourth quarters since 1945. The index has recorded a quarterly rise 85% of the time, according to CFRA research.

Midterm election years have produced even stronger fourth-quarter results. The S&P 500 has averaged a 6.4% gain during those periods as investors often see political uncertainty ease after elections.

Yasir Hussain Responds to Akif Ilyas’ Criticism

However, midterm years have historically been weaker overall. McMillion said the S&P 500 has suffered an average decline of about 15% during midterm years.

The index has avoided such a drop in 2026. Its largest decline so far has been about 9%.

Bond Yields Become Major Headwind

The sharp rise in Treasury yields is now one of the biggest concerns for equity investors.

The 10-year US Treasury yield briefly reached 5.34% on Thursday. That marked its highest level since 2002. The yield later eased, but borrowing costs remain significantly elevated.

Higher yields can make bonds more attractive compared with stocks. They can also reduce the value investors place on future corporate earnings.

At the same time, higher interest rates increase borrowing costs for companies and consumers.

“The interest rate story is the biggest headwind,” said Chuck Carlson, chief executive of Horizon Investment Services.

He said stocks could struggle to produce a meaningful rally without some relief in interest rates.

AI Spending Adds Pressure

The artificial intelligence boom is another major factor shaping the market.

Technology companies are spending heavily on data centres, computing infrastructure and AI models. Much of that expansion requires large amounts of capital.

Five major AI companies — Alphabet, Amazon, Meta, Microsoft and Oracle — have already issued about $220 billion in debt in 2026, according to LSEG data cited by Reuters. That is more than twice their combined issuance last year.

The increased borrowing adds to demand for capital and can contribute to higher yields.

Investors are also watching whether the enormous spending on AI infrastructure will produce enough earnings growth to justify current stock valuations.

Strong corporate profits have helped equities remain near record levels. However, the market’s dependence on continued AI investment has created another potential source of vulnerability.

Midterm Elections Add Uncertainty

The November 3 elections will provide another test for investors.

McMillion said Wells Fargo is on “high alert” for a possible market pullback before election day.

A change in control of both chambers of Congress could affect government policy and create new uncertainty for businesses and investors.

Still, she said a market decline could also create a buying opportunity.

For now, investors remain caught between strong historical fourth-quarter seasonality and a more challenging economic backdrop.

Rising borrowing costs, persistent inflation pressures, expensive AI investment and political uncertainty could all limit further gains. The upcoming earnings season and Federal Reserve meeting will offer important clues about whether the US stock market can maintain its 2026 momentum.