Stocks Tried to Bounce and Blew It. What Are Markets Afraid Of?

Stocks failed to sustain a bounce as US midterm voting got underway, then seesawed wildly as early results pointed to a Democratic landslide. Australia’s “dovish” rate hike may hint at what bond markets have long feared.

• Stocks struggled to recover as US midterm elections got underway, then plunged amid signs of a Democratic onslaught, only to seesaw back the other way
• The RBA raised rates to an 18-year high but forecast slower growth and dropped its readiness to hike again
• Markets now price just one more Fed rate hike in 2027 despite upbeat US jobs and manufacturing data

Markets had a chance to stage a rebound at the start of the week, and they are struggling to take it. The S&P 500 tried to bounce after Friday’s selloff, failed spectacularly, and now sits pinned within a hair of last week’s low. The tech-heavy Nasdaq 100 is similarly stuck after skidding into the lowest close since late July on Monday.

That marks a shift. In each of the past two weeks, stocks steadied ahead of major event risk and sold off once it passed. This time, they are not waiting. Macro event risk has inspired no greater deference. Traders might have waited to see US midterm election results or October’s US jobs report before committing in earnest one way or another. Such nuance now seems lost on them.

Markets outside of equities – from precious metals to crude oil and the dollar – also finished the day in wait-and-see mode, bracing to see what US voters would call forth. As it happened, Democrats scored a landslide victory. The party flipped seven Senate seats to wrest control of the upper legislative chamber with an outright 54-43 majority. In the House of Representatives, 47 seats swing the Democrats’ way to give them a 228-133 advantage. They also flipped four governorships their way in Iowa, Ohio, Georgia, and – shockingly – Texas.

Stocks and the dollar fell at first while Treasuries launched higher as the results washed over global markets. President Trump vowed to veto the incoming Congress’ agenda. The markets’ response then seemingly anticipated fiscal gridlock that puts the brakes on spending and throttles policymaking in key areas like AI regulation, perhaps alongside a new effort to force the end of the US-Iran war.

That first response quickly lost steam, however. S&P 500 and Nasdaq 100 futures erased losses of as much 1.4% and 2.4% respectively to trade flat before the opening bell on Wall Street.

The RBA may be sending an early warning

Ominous news came from Australia. The Reserve Bank of Australia (RBA) raised its benchmark rate by 25 basis points (bps) to 4.85%, an 18-year high and its fifth hike this year, but the decision was split 6-3. The central bank forecast slower growth in 2027 and cut language signaling a readiness to tighten further from the policy statement, even as it flagged lingering inflation risks from the US-Iran war and the global AI boom. The Australian dollar fell sharply, and futures markets now price a less hawkish RBA path than a month ago.

As a commodity exporter, Australia sits near the front of the global supply chain, so its economy can be an early barometer of shifts in worldwide demand. A central bank bracing for deceleration there may foreshadow what lies ahead elsewhere.

Why are Fed rate hike bets fading?

US data still looked sturdy on the surface. Job openings rose to 7.5 million in September, well above the 7.1 million expected, according to the Job Openings and Labor Turnover Survey (JOLTS). Layoffs fell to the lowest since March 2025, and the quits rate, a measure of voluntary departures, climbed to its highest in over a year. The jobs figures are backward-looking, however, and October’s payrolls report arrives Friday.

Markets have been paring Fed rate hike expectations through October anyway. A December increase is still seen as likely and is fully priced by January. But where two more hikes were fully priced for 2027 only recently, markets now price just one, and it is not fully discounted until June. The Fed itself projects none next year.

That disconnect echoes the RBA’s message. If a global slowdown is gathering, signs of it surfacing in commodity-linked economies like Australia may precede its arrival in US data. Last week’s GDP report showed how exposed the US economy is. Rising import costs more than erased the contribution from consumer spending, leaving growth resting almost entirely on investment in data centers. If the AI buildout slows, the economy would have little else to lean on.

Earlier this week, The manufacturing purchasing managers index (PMI) from the Institute for Supply Management (ISM) hit its second-highest reading in four years, but its details warned of a cooldown in the pipeline. The ISM services survey, covering the much larger services side of the economy, is expected to show steady growth at 54.8 in October, little changed from 54.9 in the prior month. Rate hike bets may keep fading if this too brings whispers of a slowdown, supporting bonds and weighing on the dollar. Under the circumstances, stocks are unlikely to be pleased.