The months leading up to a midterm election are typically a difficult time for investors in the U.S.

AI fears are rattling the stock market.

The latest cracks in the artificial-intelligence trade are emerging at a particularly troubling time for investors.

Semiconductor stocks, industrials and other corners of the U.S. equity market closely associated with AI were taking a hit on Monday, after Anthropic CEO Dario Amodei warned in a blog post about the need to slow the pace of AI progress for safety reasons. Several other AI luminaries, including Tesla (TSLA) and SpaceX (SPCX) CEO Elon Musk and OpenAI CEO Sam Altman, have said they agree with Amodei's concerns.

Last week, Anthropic employee Jacob Coxon said in a post on X that he had left the company because he felt that the headlong race to develop AI with the ability to improve itself could potentially threaten humanity if the proper guardrails weren't put into place.

Also on Monday, the yield on the 10-year Treasury note BX:TMUBMUSD10Y touched its highest level since 2007, adding another entry to investors' growing list of concerns.

September is historically a bad month for stocks, and Septembers during midterm election years have a reputation for being particularly rough, said Hardika Singh, a strategist at Fundstrat.

"You have the 10-year [Treasury yield] at 5%, oil prices above $100 a barrel, and now these fears are cropping up," Singh told MarketWatch. "I think it's very worrisome that this is all happening right now."

Strong earnings revisions have helped to propel stocks higher this year - but with the next meaningful earnings reports months away, the lack of fresh good news could also create problems. Recent reports from companies like Oracle (ORCL) have been met with a lackluster response from the market, despite the numbers looking fairly strong.

"The lack of earnings right now is really hurting," Singh noted.

Sam Stovall, chief investment strategist at CFRA Research, has closely studied these historical trends. According to his analysis, going back to 1945, the second and third quarters of midterm election years have registered the only back-to-back quarterly declines for the stock market, on average, during four-year presidential cycles.

Midterm years have averaged the worst calendar-year returns over four-year election cycles, and the steepest intrayear drawdowns. Selloffs so far in 2026 have been relatively mild at the index level, and the fact that investors endured a big momentum selloff in July could mean that losses later in the year will be more contained, Singh said.

 
Presidential cycle        Average price % change                         Frequency  of advance                       Average % drawdown 
                          Q1                      Q2    Q3    Q4   Year  Q1                     Q2   Q3   Q4   Year 
Year 1                    0                       3.2   1.5   4.1  9.5   52%                    62%  67%  80%  65%   -12.9 
Year 2                    0.8                     -2.6  -0.8  6.4  3.8   45%                    50%  60%  85%  55%   -18 
Year 3                    7.0                     4.7   0.4   3.8  16.3  90%                    75%  55%  75%  85%   -11.4 
Year 4                    0.6                     3.2   1.2   2.3  6.8   58%                    68%  58%  79%  79%   -12.9 
All Years                 2.0                     2.0   0.5   4.2  9.1   62%                    63%  59%  80%  71%   -13.8 
Source: CFRA, S&P Global 

To be sure, the sense of panic that had rattled major U.S. equity indexes early on Monday was already fading in afternoon trading. Semiconductor stocks like Nvidia (NVDA) and industrial names like Caterpillar (CAT) remained under significant pressure. But strong gains for shares of cybersecurity stocks like CrowdStrike Holdings (CRWD), and hyperscalers Microsoft (MSFT) and Google parent Alphabet (GOOGL) (GOOG), were helping to pick up the slack.

That other stocks have frequently rallied when AI-linked names have struggled has helped to limit pain at the index level this year. The S&P 500 SPX finished only marginally lower in July, even as the U.S. equity market saw one of the biggest drawdowns for highflying momentum stocks in recent memory.

Popular risk indicators remained relatively contained, raising the risk that investors might be feeling complacent about all of these risks.

The Cboe Volatility Index VIX, known as the VIX or Wall Street's "fear gauge," remains relatively tame, and corporate credit spreads have seen only a modest pickup despite simmering concerns about aggressive debt issuance to finance the AI build-out.

The share of S&P 500 companies trading above their 20-day moving average - viewed as a short-term trend tracker - has tumbled over the past few weeks, a sign that rising bond yields might start to exert more widespread pressure on the market. And with the Federal Reserve widely expected to deliver an interest-rate hike later this week, it is worth keeping in mind that near-term returns for the S&P 500 following a hike have also been tepid, Singh said.

"Higher yields have unraveled some of the diversification that we saw this summer," she added.

Meanwhile, any pain investors experience over the coming months may well be-short lived. While the run-up to Election Day is often turbulent, the months that follow typically see much stronger performance.

"It adds to the uncertainty, which is what causes the volatility and the average decline in the market leading up to the election," Stovall told MarketWatch. "Once it has run its course, then that's when the market tends to advance."

-Joseph Adinolfi