Markets are working through political uncertainty, heavy investment in artificial intelligence (AI) and interest rates that remain well above last decade’s levels. In our quarterly market update webinar, Prime Capital Financial’s team looked at what is driving volatility, how long those forces may last, and where portfolio risk may be underestimated.
The short version: the economy hasn’t broken. Consumer spending is growing, corporate investment is active and broad equity markets have delivered strong results. But beneath the headline returns, many portfolios are more concentrated than investors realize.
Key Takeaways
- Election volatility tends to be short-lived. Markets react to uncertainty more than outcomes, and clarity after midterm elections has historically supported stronger markets in the months that follow.
- AI is not a single trade. It spans cloud platforms, chips, data centers, power infrastructure and software, and the market is shifting from rewarding exposure to rewarding monetization.
- Index funds may be less diversified than they look. A small group of mega-cap companies, many tied to AI, makes up a large share of the S&P 500.
- Inflation matters more than oil. Inflation drives central bank policy and the path of interest rates.
- Fixed income is relevant again. Mid-single-digit yields are achievable in parts of the bond market, making bonds an income source, not just a defensive placeholder.
- Diversify with intent. Every risk in a portfolio should have a clearly defined role.
How Do Midterm Elections Affect the Stock Market?
Elections usually cause short-term volatility because markets dislike uncertainty, not because of any specific political outcome. Once results are clear, investors can price policy expectations with more confidence, and that clarity has historically supported stronger market behavior in the months after midterm elections.
Over longer periods, earnings, interest rates, liquidity and business fundamentals matter more than politics. A sharp drop after an election may feel significant, but the real question is whether the economic backdrop is intact. If corporate profits keep growing, employment stays stable and credit markets keep functioning, political volatility is more likely a temporary repricing than a structural problem.
Is the AI Trade Still Driving Markets?
AI remains the market’s most powerful theme, but it’s becoming more selective. The AI ecosystem includes hyperscale cloud platforms, semiconductor manufacturers, hardware providers, data centers, power infrastructure and software businesses. Companies tied directly to chips, compute capacity and infrastructure buildout have seen the strongest earnings growth and share price gains.
What’s changing is how that spending is funded and judged. Hyperscalers first paid for AI buildouts with free cash flow and are increasingly turning to debt. As a result, investors are scrutinizing return on invested capital more closely. Going forward, companies will be judged less on their exposure to AI and more on whether spending turns into measurable revenue growth, margin expansion, productivity gains and durable competitive advantage.
If monetization falls short or funding costs rise, markets could see renewed volatility.
Are Index Funds Too Concentrated in AI Stocks?
Many investors assume they’re diversified because they own an index fund. But major equity indexes have become top-heavy, and a small group of mega-cap companies, many directly or indirectly tied to AI, now represents a large share of the S&P 500.
That concentration has worked well while earnings and investor enthusiasm have supported the largest technology names. It also means index investors may have more exposure to a single theme than they realize.
AI exposure also shows up in less obvious places:
- Value indexes that include some large technology companies
- Emerging market funds with significant semiconductor, memory and hardware holdings
- Industrials and utilities tied to data centers, electrical equipment and power demand
This is why portfolio due diligence matters more than a fund’s category label. Stock prices ultimately depend on two things: earnings and the price investors are willing to pay for those earnings. Strong earnings growth can still come with volatility if valuation multiples contract.
What Do Inflation, Oil and Jobs Mean for Markets?
Inflation is the bigger risk. Oil spikes tied to geopolitical conflict can pressure consumers and feed inflation, but oil near historically familiar levels doesn’t derail equity markets on its own. Inflation matters more because it shapes central bank policy and interest rates.
Rates are normalizing. After years of near-zero rates, higher borrowing costs can pressure long-duration growth assets and companies funding large capital projects with debt. Higher yields also benefit income-focused investors, including retirees and institutions.
The labor market is stable. Low hiring and low firing point to a productivity-driven economy rather than a broad downturn. If technology improves productivity without widespread job losses, it could support margins and economic resilience.
How Should Investors Adjust Portfolio Strategy When Interest Rates Are Higher?
Persistent inflation, large fiscal deficits, heavy corporate bond issuance and strong demand for capital have kept yields elevated. That affects equity valuations, housing affordability, borrowing costs and appetite for risk.
Treat fixed income as an active tool
Bonds can now generate meaningful income, with mid-single-digit yields achievable across parts of the fixed income market. That helps investors pursue financial plan goals with less reliance on stock market gains. The key decision isn’t just how much fixed income to own, but which type. Treasuries, municipal bonds, investment-grade credit, high yield and private credit each carry different liquidity, tax, duration and credit risk.
Put volatility in context
Intra-year drawdowns are common, even in years that finish positive. Since 1980, the S&P 500 has frequently seen meaningful declines within a year, yet most calendar years still ended higher. Short-term stress can push investors to abandon long-term plans at exactly the wrong time.
Reassess concentration before volatility arrives
After several strong years for large-cap growth and technology, now is a good time to review:
- Concentration risk and factor exposure
- Liquidity needs
- Tax positioning
- Downside protection
Diversify with purpose
When market leadership narrows and valuations depend on future growth, diversification becomes more important. Depending on your goals, that may include value equities, international stocks, quality businesses, real assets, tax-efficient municipal bonds, direct indexing, alternatives or private markets.
The goal isn’t to eliminate risk. It’s to make sure every risk has a clearly defined role.
The Bottom Line
Politics, AI investment, interest rates, consumer behavior and market concentration all shape outcomes, but none should be evaluated in isolation. Investors should know what they own, why they own it and how concentrated their exposures are. Portfolios built with balance, flexibility and long-term intent are better positioned to absorb volatility and capture durable value.
Want to know how concentrated your portfolio really is? Schedule a conversation with a Prime Capital Financial advisor to review your exposures, fixed income strategy and long-term plan. You can also watch the full webinar replay.
Frequently Asked Questions
Do midterm elections cause stock market declines?
Midterm elections often bring short-term volatility because markets react to uncertainty. Once results are clear, that uncertainty typically fades, and markets have historically performed better in the months following midterm periods.
Is the S&P 500 too concentrated in AI stocks?
A small group of mega-cap companies, many tied to AI, makes up a large share of the S&P 500. That means index fund investors may have more exposure to the AI theme than they realize, even if they consider themselves diversified.
Are bonds a good investment when interest rates are high?
Higher rates have made fixed income more attractive for income, with mid-single-digit yields available in parts of the bond market. The right mix depends on each investor’s liquidity needs, tax situation and tolerance for duration and credit risk.
What is the biggest risk to the stock market right now?
Key risks include sticky inflation keeping rates elevated, AI spending that fails to produce returns, and concentration in a narrow group of large technology companies. Political events tend to cause shorter-term volatility.
How can I tell if my portfolio is truly diversified?
Look past fund labels like “growth,” “value” or “international” and review the underlying holdings. Many funds share exposure to the same AI-related companies. An advisor can help analyze concentration, factor exposure and hidden overlaps.
