The next few weeks are likely to bring market volatility as third-quarter earnings, the Federal Reserve meeting and next month’s U.S. midterm elections arrive in quick succession, potentially exacerbating an already skittish backdrop.
Investors have lately tended to act first and ask questions later, particularly around AI, and that reactivity leaves any negative narrative with room to run. Sharp risk-off moments—as we saw last week when Meta reported earnings and flagged substantial future AI capital expenditure needs—are therefore likely, and they will test the rally that continues to push the S&P 500 to fresh all-time highs.
Yet rather than withdraw, we believe investors should stay invested, using flexibility and selectivity to ride out any turbulence and reach a more supportive period beyond. Each of the three tests shows why.
Earnings: The Margin Question
Strategists broadly expect earnings growth to decelerate next year, so the debate has shifted from revenue to margins. Demand for AI still looks strong, but consumer adoption has yet to deliver the step-up in demand a true mass-market use case might. Enterprise spending is carrying the story, but the margins earned by AI enablers over the last two years likely face pressure from higher borrowing costs, power and component bottlenecks, and the possibility of higher tariffs and taxes.
History argues for humility; investors have heard ‘peak margin’ warnings before, and companies that endure usually find ways to earn more. For large technology companies, a key question is whether core franchises such as advertising, cloud, or both, can achieve further scale on heavy capital expenditure while their reliance on borrowing eases. Selectivity here matters because strong aggregate results can mask wide differences in margin durability, and a reactive market is quick to punish companies that fall short.
The Fed Effect
Supported by earnings strength and solid growth, equity markets have so far weathered pullbacks on rising rates and a more hawkish Fed, and we don’t see that resilience fading. Indeed, we don’t expect the Fed to raise rates this month; a hike days before an election would likely imply a more aggressive path than the central bank likely wishes to telegraph and frankly justify. Chair Warsh may instead make the case to wait until December for a possible hike, after which a lengthy pause is plausible even as AI spending keeps the U.S. on a growth path.
The European Central Bank and Bank of England, which meet Thursday, are also likely to hold until December, though European and U.K. policy is more sensitive to energy price volatility, adding greater uncertainty to timing. Given this backdrop, it’s important to stay flexible because a December decision delays rather than resolves rate risk, and positioning should be able to adapt if inflation or energy prices shift the timeline.
Block Out the Midterm Noise
Campaign themes center on polarizing, fear-driven issues, from AI privacy and disintermediation to data centers and consumer prices. Yet the more important question is what the outcome means for growth over the next two years, and whether a difficult legislative environment limits fiscal action. We see those as 2027 concerns, alongside tougher year-over-year earnings comparisons.
Nearer term, the period from just after the election through year-end looks more constructive. Regulatory conditions rarely change overnight, and year-end positioning has tended to support equities. Provided tech earnings do not disappoint, we would expect investors to stay engaged through that window, while the weeks before the election are likely to be more volatile. Given this, investors need to block out election-driven noise rather than react to it, and position for the stronger seasonal period that follows.
Stay Flexible, Stay Selective
The AI theme no longer lifts all related stocks at once. The market is rewarding companies that pair a clear growth trajectory with access to capital, dividing companies that can fund their growth from those that cannot. The same applies to industrials, where rising borrowing costs make balance sheet strength and rate sensitivity the deciding factors in who benefits.
Selectivity also means looking beyond crowded positions. Healthcare is a popular destination, while the consumer is out of favor, yet the global consumer may be more engaged than sentiment implies, leaving room for selective exposure. Energy, materials and commodities sectors also continue to look supported, in our view. In these cyclical areas, owning the cycle matters more than picking names, and little we can see stands in the way in the short to medium term.
Between now and year-end, investors should expect bouts of volatility, followed by a more supportive period. It’s important then to stay invested through the first and be positioned for the second, favoring companies with the balance sheets and margins to withstand what 2027 may bring.
What to Watch For
Tuesday 10/27
- U.S.: Durable Goods Orders
- U.S.: CB Consumer Confidence
- U.S.: New Home Sales
- New Zealand: RBNZ Interest Rate Decision
Wednesday 10/28
- U.S.: Federal Reserve Interest Rate Decision
- Canada: BoC Interest rate Decision
Thursday 10/29
- U.S.: Core PCE Price Index
- U.S.: GDP
- Eurozone: ECB Interest Rate Decision
- U.K.: BoE Interest Rate Decision
Friday 10/30
- U.S.: Chicago Purchasing Managers’ Index
- Eurozone: GDP
- Germany: GDP
- Germany: Consumer Price Inflation
- China: Manufacturing Purchasing Managers’ Index
