Too Close To The Sun?

Scott Poore, AIF^®, AWMA^®, APMA^®

October 23, 2026

This time of year is full of freights and goblins as we near Halloween, but when it comes to equity markets there may be more tricks than treats ahead. Markets typically experience more volatility as mid-term elections approach, but uncertainty centered around AI is causing a bit more concern than normal this time of year. Are investors, like Icarus, too enamored with with

AI-generated vintage poster: Hotel California on a dark desert highway at sunset

the latest thing? This week we gather inspiration from the 1976 song "Hotel California" recorded by The Eagles. Here is some trivia about the song:

This song reached #1 on the Billboard charts in 1977, even though the album was released in 1976, and sold more than 7 million copies worldwide.
The song won a Grammy in 1977 for Record of the Year, but the band did not show up to accept the award. Don Henley didn't believe in contests and the band was busy recording their next album so they watched the ceremony from the recording studio.
There has been much speculation by fans regarding the meaning behind the lyrics of the song. Henley stated, "Some of the wilder interpretations of that song have been amazing. It was really about the excesses of American culture and certain girls we knew."¹
Despite the song's success, it has been surrounded by controversy. The name of the song was involved in a lawsuit in 2017 due to the use of a property in Baja, California that used the name "Hotel California" which prompted a suit filed by The Eagles. The case was ultimately resolved by the hotel's withdrawal of its trademark application to use the name.
Also linked to controversy was Ed Sanders, who was hired by the band in the 1970s for an authorized biography of the band. He allegedly stole handwritten lyrics, notes, and related documents, including initial drafts of "Hotel California," from Don Henley's possession while working on the project. The project was ultimately abandoned, but the pages turned up in 2012 when a rare-book dealer tried to sell the pages, prompting a criminal trial. After the trial ended in dismissal of the charges against the book dealer and other defendants, Henley filed a civil lawsuit and the defendants filed a counter-suit for malicious prosecution. As of this writing, the civil proceedings remain ongoing.

Here's what we've seen so far this week...

Checkout Anytime, But Never Leave? Glenn Fry of The Eagles once compared this song to The Twilight Zone, where images painted in the song don't necessarily make sense, but the audience can create their own stories. That may be the case with equity equity markets today as individual investors seem to be enamored with certain sectors of the market with less

Goldman Sachs Prime Desk sector trading flows, Oct. 9-15, Info Tech most sold

concern for risk. Yet, institutional investors are pairing back on risk, especially in the technology sector. This week Ken Griffin of Citadel indicated that "corporate America' is looking at their AI bills and wondering what kind of productivity they are actually getting.² As such, not only are hedge funds and institutional investors reducing equity, technology, as displayed in the graph, is being reduced at a 2-to-1 ratio compared to other equity sector reductions.

While institutional investors seem to be de-risking their portfolios, retail investors appear to be adding or maintaining risk. While some AI-related names are coming under some pressure, retail investors continue "buying the dip." According to Viraj Patel, global market strategist of Vanda Research, recently noted that while institutional buying of AI-related baskets of stocks

Direxion Daily Semiconductors 3X price and weekly fund flows, largest inflow on record

has faded, retail buying of AI-related named continues.³ While semiconductor stocks were down approximately 10% last week⁴, retail flows into the 3-times leveraged semiconductor ETF reached their highest weekly total last week, according to the chart. That would indicate the investors making that type of allocation are comfortable with quite a bit of risk. It should be noted that what goes up with leverage, also works in reverse, which could be painful. If Ken Griffin is correct and AI-related stocks are trading at multiples that perhaps their financials can't support, investors might be wise to reconsider adding to elevated positions at this time. It is noteworthy that despite the warning, Griffin suggested the leaders in AI who have long-term staying power are “companies that are on the other side of that bubble are the market leaders for decades to come.”²

Just Prisoners? Just as some investors are caught up in their tech-heavy portfolios that have performed well over the last couple of years, the Fed is caught between rising inflation, a soft job market, and AI-related bond issues. We noted the higher than expected inflation numbers last week that one might have thought could influence a Fed rate hike.⁵ In addition, the

CME FedWatch: 90% probability of no rate hike at the Oct. 28, 2026 Fed meeting

Cleveland Federal Reserve is expecting the Consumer Price Index to rise again this month from 3.6% to 3.8%.⁶ And yet, futures for next week's Fed meeting stands at a 90% probability of no rate hike. Earlier this month Fed Governor Waller stated, "The hikes do not need to come at consecutive meetings"⁷ and just last week Fed President Daly stated, "Why force urgency when you don't need to have urgency".⁸ For now it appears the Fed is in no hurry to hike at the end of this month.

That being said, the Fed's own Dot-plot indicated at least one more rate hike in 2026, which leaves the December meeting as the only meeting available outside of next week for the Fed to take an action on interest rates this year.⁹ Perhaps the bond market is doing the Fed's work for them as interest rates have risen and lower quality credit is under some stress. While the

StockCharts: ICE BofA CCC and lower vs. high yield option-adjusted spreads, 2026

beginning of the war with Iran caused high yield bond spreads over government bonds to rise, spreads of credit quality bonds of CCC or lower at the bottom half of the high yield sector did not move as much. That changed in May as the CCC and lower quality end of the curve began to move higher and since the stress in AI debt began the spreads on CCC and lower bond has increased 27% (or, 281 basis points).¹⁰ Spreads in the high yield sector move higher as stress and risk in the market rises. According to Allianz, future rate hikes along with concerns regarding AI financing and revenue growth could put more pressure on the AI credit market that could bleed over into the public credit market.¹¹ It will be interesting to see if further stress on bonds changes the Fed's expected path toward rate hikes.

Goldman Sachs chart: S&P 500 returns during midterm election years since 1974

Such A Lovely Place? The singers of "Hotel California" welcome the listener to a "lovely place" where there's plenty of room at any time of the year. Well, it's mid-term election time of the year and that typically means volatility in equities surrounding uncertainty in the political real. The historical average for the VIX (volatility) Index is approximately 19.5.¹² However, around mid-term election time it typically averages 21.2.¹³ But, what happens after mid-term elections are over? According to Lance Roberts of RIAAdvisors.com, since 1974 the S&P 500 Index has been higher in outcomes when there is a split Congress coming out of mid-terms and lower when Congress is controlled by one party.¹⁴ So we'll have to wait until after November 3rd to find out the results of the election and how they might impact markets.

There are some positives to take away from mid-term elections. The 12 months after mid-term elections, going back to World War II, the S&P 500 Index was higher. According to the table, the average return was +14.3%. That being said, there have been a few cases where the result was marginal at best. Following the 1946 mid-term election, stocks were only slightly higher

Table: S&P 500 12-month price returns after U.S. midterm elections, 1946-2022

than flat. Similarly, following the 1986 mid-terms the market was higher by a little more than 1% 12 months later. That does leave some room for volatility over a 12-month period. On the line this year is the political environment surrounding data centers and the push-back at the local level where data centers are planned. Should that issue go the wrong way, it could put additional pressure on AI-related companies. Making significant changes to portfolios might not be the best course of action leading up to mid-term elections as market movements could be short-term in nature. However, investors might want to consider adjusting portfolios to make sure risk is appropriate given long-term investing objectives. Like Icarus who flew too close to the sun after being warned, investors could have an opportunity here to evaluate and recalibrate their investments to agree with stated goals.

Click here to a live version of the song performed in 1977.....

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

References to specific securities are for illustrative purposes only and are not recommendations.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.