Strategists at Barclays wrote that markets are likely to face several upcoming challenges despite a strong second-quarter earnings season.

Stocks are currently driven by a strong second-quarter earnings season, but markets could be entering a difficult period.

The majority of companies in the S&P 500 SPX have now reported financial results, with several major Wall Street banks upgrading their targets for the stock market index to 8,000 on the back of impressive profits and evidence for the monetization of artificial intelligence.

On Aug. 7, when 88% of companies had posted earnings, three in four beat estimates for revenue and 86% beat estimates for earnings per share, according to FactSet data.

But for Barclays, although robust results are currently providing a tailwind for equities, markets will likely face several upcoming challenges.

"For now, equities remain underpinned by solid earnings, but face potential risks from rising macro volatility, AI-driven capital supply concerns, and challenging pre-midterms seasonality," wrote a team at Barclays, led by Emmanuel Cau, head of European equity strategy.

The potential for uncertainty comes as investors await the Federal Reserve's next meeting in September. Markets are pricing in a 64% chance that the central bank will vote to hold interest rates at their current level, according to FedWatch.

The strategists said in a Wednesday note that, if Fed Chair Kevin Warsh provides clarity on how the bank intends to respond to inflation during his speech on Friday at the Jackson Hole Economic Policy Symposium, markets would likely welcome this development.

Traders are also bracing for midterm elections on Nov. 3, with bettors on Polymarket saying there's a 49% chance that the Democratic Party will win both houses of Congress, and an additional 38% probability the Democrats will win a majority in the House while the Republican Party holds on to the Senate. (Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch.)

Strategists at Citigroup previously found that investors usually act on uncertainty about 50 days before voting takes place.

"A continued grinding higher remains our base case, but likely requires calmer bond and oil markets, amid a typically volatile back-to-school period," the strategists said.

-Nora Redmond