Five Battles to Define Markets in 2026 Q4
Author: AGF Investments
October 9, 2026
Of the many stories that have defined equity markets through the first three quarters of 2026, none have been more impactful than the continued resilience of corporate earnings in the face of rising inflation, artificial intelligence (AI) upheaval, and geopolitical turmoil.
While major North American indices have remained heavily concentrated on big tech, the breadth in earnings growth across the market has been extremely encouraging. The width of the AI ecosystem is supporting high revenues across sectors.
“I have not seen these kinds of growth rates—revenues or earnings—from the broad market in non-recessionary times in my investment career, which is 30-plus years,” says John Porter, AGF Management Limited’s Chief Investment Officer. “It may be bordering on all-time. This really is an unprecedented period of strength.”
However, a combination of political developments, ongoing global conflicts, and investor speculation is likely to test this resiliency even more before 2026 ends. Will earnings continue to lead the day? Several portfolio managers at AGF Investments weighed in on five key battles that could determine the answer to that question.
Rhetoric vs. Reality in the US Mid-Term Elections
The US Mid-Term election on November 3rd could prove eventful with the Democrats vying for control of the House of Representatives and the Senate.
If the Democrats take control of the House, history suggests a divided government would make significant policy changes harder to implement. Markets often respond favorably to political gridlock as policy stability reduces uncertainty for businesses and investors.
The Democrats securing both chambers of Congress could prove more tumultuous for markets. Such a result could increase the likelihood of policy changes regarding government spending and taxation, which carry implications for economic growth and corporate earnings. It would also shape the political landscape heading into the 2028 presidential election.
Political campaigns are often defined by ambitious promises that spark headlines and create market noise—implementing policy is easier said than done. The real battle for investors to navigate, therefore, may be between rhetoric and reality, regardless of the polling results.
David Stonehouse, SVP and Head of North American and Specialty Investments:
“The prospect of political gridlock with a divided government seems a near certainty. Democrats may try to force through legislation if they also win the Senate, although the presidential veto may be difficult to overcome. Such prior situations have resulted in some legislation being passed through bargaining between Congress and the president, and the need to increase the debt ceiling could generate some compromises.”
Safety vs. Competitive Pressure in the AI Arms Race
For much of 2026, the breakneck pace of artificial intelligence development showed no signs of slowing down—then one of the industry’s most prominent voices suggested it should.
On September 12th, Dario Amodei, the CEO of Anthropic, implored companies to pump the brakes on developing frontier models so quickly lest they become fully autonomous before humans can build the guardrails needed to keep them in line.
This letter was initially met with agreement from OpenAI CEO Sam Altman as well as Elon Musk but has since been rebuffed by several key figures. President Trump is one of them, framing Amodei’s plea as fearmongering that threatens to undermine the US’s efforts to maintain leadership in artificial intelligence over China and the rest of the world.
Safety concerns and competitive momentum now appear directly at odds. The question for investors is whether caution ultimately wins out, or whether the financial incentives for AI companies to push full steam ahead will prove too lucrative to ignore.
Auritro Kundu, VP and Portfolio Manager:
“We think investors should be careful not to interpret the safety debate as a sign that the AI investment cycle is ending. It is more likely to redirect it and, in many cases, increase it through more compute, infrastructure, security, governance, and complexity. The pace of AI development may be up for debate—the direction of travel is not.”
The U.S. Federal Reserve vs. Persistent Inflation
The U.S. Federal Reserve (Fed) raised interest rates for the first time in three years on September 16th—and another hike could still be in the cards.
The Fed has been deliberately tight-lipped under the leadership of new Chairman Kevin Warsh, generally spurning forward guidance to seemingly give itself more flexibility. Their public insinuations of another hike being needed before the end of 2026 to lower inflation closer to their 2% target are even more noteworthy with this in mind.
While equity markets priced in and subsequently pushed through the initial rise in September, a second hike could further test the strength of economic growth and have a more meaningful impact on investors. The higher cost of borrowing would be hard to ignore, with persistently high oil prices amidst the ongoing war in Iran only exacerbating the issue.
Warsh and company are at a fork in the road: is hiking again in hopes of decreasing inflation worth the risk of slowing down the economy? Their answer to this question could have a significant effect on the direction of markets to close out the year.
David Stonehouse:
“With nominal GDP growth running north of 6% and various measures of inflation either side of 3%, financial conditions do not appear to be restrictive, so the Fed seems obliged to follow through with more tightening. Equity investors are likely to continue favouring resilient sectors and companies that can demonstrate strong earnings growth in a higher rate environment, barring a reversal of the rise in bond yields—on which the Treasury’s fiscal actions should also have an impact.”
US vs. Iran in the Strait of Hormuz
The war in Iran rages on with no end in sight. The Strait of Hormuz, through which more than 20% of the world’s oil normally flows, remains at the centre of the conflict.
Markets fell dramatically when the US first attacked Iran on February 28th. The American government attempted to quell fears by suggesting the fighting would only last a couple of weeks, but now we’ve passed more than six months without a resolution. There is no telling when and how this conflict will ultimately be resolved.
Consumers have felt the consequences at the pumps; gas prices throughout North America are still significantly higher than they were before the war. Markets, however, have rebounded from the initial shock to reach new all-time highs on the strength of corporate earnings.
Will markets continue to take knock-on effects of the war in stride? The impact may be muted, but any meaningful development could shift the narrative—every new headline could tip the scales.
John Porter:
“We may need to get used to a new normal in terms of prices at the pumps. We are really constrained in terms of refining capacity, particularly here in North America. Refining margins are blowing out. They’ve been stubbornly sticky, and we see no reason for that to change. There’s no relief on the horizon, even if we get some relief on crude oil prices.”
Market Optimism vs. Trade War Consequences
The trade war between the US and Canada has dominated headlines for much of 2026, yet its observable impact on the markets has been minimal. Could that change?
Hostilities between both countries have increased since a potential deal fell apart at the eleventh hour in early September. All signs point to things getting worse before they get better, especially with Canadian Prime Minister Mark Carney committed to matching any tariffs imposed by the current US administration led by President Donald Trump.
So far, enthusiasm surrounding artificial intelligence and resilient corporate earnings have allowed markets to largely look through this conflict. Whether that can and will continue, especially if tensions keep rising, could be a crucial consideration for investors.
A deal could be struck at any time, however, and this trade war could ultimately prove inconsequential to markets from start to finish. Yet it’s also possible that the weight of these tariffs on businesses and consumers becomes impossible to ignore, forcing investors to reassess a risk that they have largely shrugged off for much of the year.
Steve Duench, VP and Portfolio Manager:
“Market breadth is narrow and some sectors—like utilities and consumer staples—are feeling the effects of the trade war more than others. While a turnaround in these sectors may not be imminent until expectations of more interest rate hikes begin to subside, a de-escalation in the trade war between the US and Canada could be an important catalyst.”
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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