Midterms, AI & Fed Hikes: What Financial Advisors Need to Know

• 32% projected earnings growth: Corporate earnings are expected to grow 32% this year, while profit margins remain near 16%, supporting equity valuations despite market uncertainty.
• 50% of advisors cite client concerns: Half of surveyed advisors said their clients are asking whether they should adjust their portfolios ahead of the midterm elections.
• 5% – 10% fixed income yields: High-quality bonds offer yields of 5%–6%, while select credit sectors yield 8% – 10%, creating income opportunities amid interest rate uncertainty.

Midterm Election Outlook and Policy Gridlock

The upcoming November midterms present meaningful political shifts that could alter congressional control. Republicans currently hold majorities across the House, Senate, and the executive branch. Democrats need a net gain of just three seats to reclaim the House of Representatives, where prediction markets assign high odds. The Senate remains closely contested, with Democrats requiring four seat victories across several traditionally conservative states.

During an interactive live poll, 50% of attending advisors reported their clients are asking whether they should adjust their portfolios. Aliaga cautioned against emotional shifts, noting historical data shows election configurations rarely dictate long-term market performance. She explained that divided government historically produces legislative gridlock, which typically constrains new discretionary spending and prevents further federal deficit expansion. Sharing an anecdote from her research team, Aliaga recalled that a past federal shutdown created two months of statistical data black holes. Trade policy will likely remain steady regardless of election outcomes because tariff implementation relies heavily on executive authority.

See More: U.S. vs. Canadian ETFs: What Each Market Can Learn From the Other

Corporate Earnings and the AI Investment Cycle

Fundamental earnings strength serves as the primary engine driving market performance near record highs. Consensus estimates project broad market earnings growth of 32% for the year, supported by record profit margins near 16%. Aliaga quipped to attendees that markets ultimately care about three things: "earnings, earnings, and earnings." Forward price-to-earnings multiples have moderated to 19 times from previous peaks of 23 times. Aliaga noted that corporate balance sheets remain exceptionally sound, as many firms locked in low debt costs during prior years.

Artificial intelligence (AI) spending remains a central catalyst for ongoing economic and corporate momentum. Industry hyperscalers are expected to commit between $1.0 trillion and $1.5 trillion in annual capital expenditures over the coming years. Commercial demand remains verified, with industry backlogs reaching $1.7 trillion compared to current capital spending of $800 billion.

Addressing enterprise adoption, Aliaga explained that corporate productivity gains remain pedestrian because highly regulated institutions face compliance reviews and project timelines. However, broad macroeconomic productivity gains will take three to 10 years to materialize across institutional workflows.

Inflation Drivers, Fed Rate Paths & Fixed Income Strategy

Inflation dynamics in 2026 differ substantially from the post-pandemic price pressures observed in 2022. Current price increases stem primarily from energy costs tied to Middle Eastern conflict rather than widespread supply chain disruptions or excess consumer stimulus. The U.S. position as a net energy exporter and a strong labor market with 4.2% unemployment provide substantial economic resilience. Aliaga added that domestic unemployment could trend even lower toward 4.0% over the coming year.

Financial markets have priced in approximately 100 basis points of Federal Reserve rate hikes under new Fed Chair Kevin Warsh. Aliaga suggested market expectations may prove overly hawkish, creating potential for bond yields to decline if policy tightening proves more moderate. High-quality fixed income currently offers yields between 5% and 6%, while select credit sectors deliver 8% to 10%.

The webcast concluded with an audience question-and-answer session exploring macro risks and actionable portfolio construction. When asked about potential artificial intelligence (AI) downside risks, Aliaga noted that broader macroeconomic consumption slowdowns pose a greater threat than technological failure. She stressed that fixed income yields currently provide investors with paid insurance against unforeseen macroeconomic shocks. Aliaga urged financial advisors to move beyond mega-cap tech concentration by diversifying across real estate, infrastructure, and international markets.

A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.

Read more commentaries by VettaFi