Jeffrey R. Thompson, Chief Executive Officer of Donoghue Forlines1, opens the firm's October 2026 commentary with a market that looks nervous but, in his reading, is quietly coiling. The third quarter delivered volatility on two fronts at once: energy and technology. Thompson writes that markets saw "concerns over the impact of energy prices on inflation as well as CapEx spending by hyperscaler companies in the AI space driving technology stocks." WTI crude, he notes, "rallied sharply during the quarter by nearly 30%," and the response in rates was immediate and sharp, with the 10-year Treasury moving "from 4.41% to 5.29%." Layer on "elevated stock market valuations, seasonality weakness and political uncertainty with the upcoming elections" and, as Thompson puts it, investors are left "on edge."
Stretched, But Less Stretched
The S&P 500 remains above its historical valuation norms, Thompson acknowledges, though he's careful to note the multiple has compressed somewhat as prices pulled back and forward earnings estimates turned more optimistic. Underneath the index, breadth has thinned considerably: only about a quarter of S&P 500 constituents were trading above their 50-day moving averages at quarter end, and the equal-weighted index has given back the relative strength it held the prior quarter. That weakness has filtered into sentiment, with consumer confidence tracking the market's own soft patch.
The Trough Thesis
This is where Thompson's framework turns from diagnosis to conviction. Sentiment troughs, historically, are not endings but beginnings: the S&P 500 "has averaged about 24% in the following 12 months after a sentiment trough." He connects the dots explicitly to the mid-term election calendar, observing that "in the 19 instances going back to 1950 the market was up the following year every time," with average gains "in excess of 14%." Combined with a technology sector whose "forward guidance is looking for 60% earnings growth in the semiconductor industry and 40% earnings growth in the broader technology sector," and an S&P 500 seeking 15% earnings growth overall, Thompson's conclusion is direct: "the combination of the seasonal weakness along with more tempered valuation multiples and historical election macro trends have the markets positioned for a strong set up moving forward."
Portfolios Follow the Thesis
That bullishness is not rhetorical, it's positioned. The Global Tactical Portfolios added equity exposure in early August, funded out of fixed income, with the more aggressive GTG and GTE sleeves rotating "from dividend and value areas" into momentum. Fixed income moved twice: duration was cut in July via a shift from intermediate Treasuries to short-term investment grade, then high yield was trimmed in September as duration risk spread across credit. Notably, after quarter-end, the committee reversed course and added duration back as the pullback made that part of the curve attractive again, a textbook instance of the discipline-over-dogma posture Thompson's team is known for.
On the rules-based side, the DF Tactical Momentum SMA turned over roughly 90% of its holdings at its late-September reconstitution, rotating out of semiconductors, computer hardware, managed care, and select AI-infrastructure names and into software, cybersecurity, cloud infrastructure, professional services, banking, wealth management, and digital travel, while staying sector-neutral to the benchmark. The Dividend sleeve saw only its routine rebalance. DF Tactical Treasury shifted from intermediate to long-term Treasuries late in the quarter, then moved to cash equivalents after the quarter closed following a profitable trade. The blended portfolios, meanwhile, are "favoring U.S. equities and are tilted away from high yield credit and bank loans in favor of short-term treasury exposure."
Five Takeaways for Advisors and Investors
- Treat the Q3 pullback as a reset, not a reversal. Thinning breadth and soft sentiment have historically preceded strength, not confirmed weakness.
- Mind the rate-energy feedback loop. A near-30% crude rally pushed the 10-year from 4.41% to 5.29%; energy remains a live inflation and duration risk into year-end.
- Respect the mid-term seasonal pattern, but don't outsource conviction to it. A 73-year, 19-for-19 record is compelling, not a guarantee.
- Technology's earnings backdrop, not its price action, is driving the thesis. 60% semiconductor and 40% broader tech earnings growth estimates underpin the bullish stance.
- Watch positioning, not just commentary. The post-quarter reversal back into duration shows a team willing to revise fast when technicals shift, a cue for advisors managing client expectations around tactical mandates.
Footnote:
1 Thompson, Jeffrey R. "October 2026 Market Commentary." Donoghue Forlines, 27 Oct. 2026, https://donoghueforlines.com/october-2026-market-commentary/.
