With summer barely in the rearview mirror and retail outlets already in full Halloween swing, it seems only fitting that market watchers are looking ahead to the final months of the year and gauging what forces will drive, or impede, economic and market activity.
It has already been a volatile year. Shifting investor attitudes around AI, geopolitical uncertainty, tariff concerns, the ever-growing U.S. national debt, high Treasury yields and stubborn inflation have been offset to a certain degree by resilient economic performance and consistently strong corporate earnings. As we head into autumn – and brace for the so-called September effect that raises expectations for poor equity market performance during this month – investment specialists have more on their minds than historical precedents.
John Marshall, Partner at Carrick Lane, isn’t looking back at what the market has done, but has his eye on what he sees as tangible drivers of market performance over the next few months. “October has been the highest volatility month of the year over the past 90+ years on average,” he says. “After all, it is the final earnings season of the calendar year, when companies often give guidance for the next year. Similarly, it is the last flurry of major catalysts for professional stock traders to make their year.
“In addition to seasonality, we are watching three major developments this year: retail positioning in AI stocks, FOMC expectations and the midterm elections.”
AI: Driver Or Drag?
The technology sector has been a key catalyst of market movements throughout the year, with AI expectations and impacts proving a dynamic determinant of prices, both positive and negative. Industry experts do not expect that to change for the balance of the year.
Rafia Hasan, Chief Investment Officer and Chief Operating Officer at Perigon Wealth Management, says, “AI remains the market’s engine. The question is whether the future potential revenue and earnings from the technology will be there to justify the immense investment and valuations. I’m watching for any crack in enterprise adoption or capex discipline from the hyperscalers.”
Investors have become leery of the mega-outlays into AI, wondering whether the return on investment will warrant the large spend – and whether the handful of AI leaders will be able to continue bolstering the tech sector at large. Pete Alliegro, CIO at Sagient, says, “Nvidia and the broader AI complex will be critical in determining whether massive AI investment can support today’s lofty technology valuations.”
Bob Hostetter, CIO at VestGen Wealth Partners, believes the circular, thematic investment cycle is coming to an end as investors take a closer look at fundamentals.
“The ‘tech on’/ ‘tech off’ trade into and out of a semi-homogenous cohort of blue-chip names may be replaced with a more granular analysis of winners and losers having various sources of market and pricing power within an emerging AI ecosystem which might look something like: (1) Semiconductors and other AI inputs; (2) Data Center Infrastructure and Hyperscalers; (3) AI model providers such as Anthropic, Open AI, and new entrants; (4) Agentic Intermediaries and Tokenization; and (5) AI Users – those entities who receive productivity boosts from using the technology.”
Warsh Watching
“The Fed and Chair Kevin Warsh will be central, as investors assess whether persistent inflation and elevated Treasury yields force rates higher or allow a more accommodative stance,” Alliegro notes. Clint Sorenson, CEO and CIO of Ascentis Asset Management, is also keeping an eye on the central banker’s cues and actions. “Kevin Warsh has dropped forward guidance, arguing markets work best reacting to incoming data, so every CPI print now lands unfiltered, and the June dots leaned toward higher rates, with nine officials signaling hikes this year.
“Watch (Treasury Secretary) Bessent’s bond buyback program beside him, with the 30-year yield as referee. We believe we are moving from a monetary dominant regime towards fiscal dominance.”
The Election Effect
It is typical for the uncertainty inherent in elections to cast a shadow over the markets. The midterms in the near future are expected to follow this trend. With all 435 seats in the House of Representatives and 35 Senate seats up for grabs (including two special elections in Florida and Ohio), the outcome is consequential.
However, Alliegro believes the election’s impact on the markets will not be. He says, “The November midterm elections may create volatility around fiscal, regulatory and tax policy, although markets historically respond more to economic fundamentals and Fed policy than election outcomes themselves.”
Interconnectedness And Impact
All of these potential impacts intertwine and represent both challenges and opportunities. Navigating the landscape successfully will take patience, a watchful eye and a strong constitution.
Hasan says, “Continued escalation of the conflict in the Middle East has the potential to push prices higher especially given diminished strategic oil reserves and recognizing that energy shocks feed straight into inflation. This is a risk that is important to watch.”
Marshall notes, “Options markets are already pricing elevated volatility; the VIX volatility index is pricing an increase of four points through November. We will be closely monitoring positioning into the last week of October, when we expect annual AI capex guidance from the largest tech stocks at the same time as the October 28 FOMC announcement.”
Meanwhile, Hostetter believes, “What was seen in Oil and Semiconductors in 1H may extend to other areas as temporary scarcity is created by AI transformation; resetting of supply chain flows and supply/ demand imbalances may drive pricing power in unexpected areas.”
Operating within this innovation-driven environment may come down to a tried and true approach to investing: casting a wide net. According to Sorenson, “Our proprietary leading index reads growth positive and accelerating with inflation still firm: boom conditions with a policy trap. Own real assets and trend, not just the Magnificent Seven. We believe it is time to Make Diversification Great Again.”
Jim Roth is a Partner at Ascentix Partners, where Larry Roth, CEO of WSR, serves as Founder and Managing Partner. All decisions on editorial content are made by WSR’s editorial team.
