Aptus 3 Pointers, July 2026

Full Transcript

John Luke

All right, we’re live. What’s up, Dave? We’re a man short and a few days late, but we’re here for the Aptus 3 pointers for July. As you can see, D-Hern is not blessing us with his presence. I think he’s traveling today, but you got Dave and I.

What’s up, Dave? You want to lead us off with the disclosure so we don’t get shunned?

David

I do think that there is some irony here, John Luke, in me doing the disclosure, but I’ll give it my best shot because Brett Wickmann, who’s watching this video, is probably shaking in his boots right now that I’m doing it.

I’d say that the opinions expressed on today’s call are those of the Aptus Capital Investment Team. The opinions referenced in this call are subject to change due to changes in the market or economic conditions. It may not necessarily come to pass. Forward-looking statements cannot be guaranteed. You may find out more in our lineup of products and services by looking at our ADV which can be found on our website.

So, John Luke, it does feel like we are short-staffed without D-Hern. And as you called it, I think before, we’re missing our third Musketeer.

I got a question, John. Could you name any of the Musketeers?

John Luke

I can’t say I could. I’ll embarrass myself trying.

David

You disappointed Brad Rapking who graduated from Xavier whose mascot’s the Musketeers. The only one I can actually name is D’Artagnan, and he’s not even one of the Three Musketeers. He was the fourth Musketeer who was trying to be cool and get in the inner circle.

John Luke

Leopold sounds like one of the Musketeer names, and we’ll loop him in here.

David

Where would he be on the string of Musketeers on an ordinal ranking? Well, he could be last.

John Luke

He’s the horse they ride that gives out.

David

I feel like we can make a Don Quixote reference here, too, and Sancho Panza because I feel like they were riding a Three Musketeer-esque course but just fighting the windmills or something that weren’t actually there. And you could probably say that on his over-leveraged stock situational awareness which came front and center in this market here over the past month.

I think one thing that we’ve been talking about with a lot of our different partners here at Aptus is a lot of the exuberance in this AI trade, specifically the memory wall trade. So, think your Microns, yours Sandisks, Western Digitals, and you really had a lot of those exuberant names in that memory wall trade really pulled back here just in the month of July. As you can see, the return for the NASDAQ in July was down about 6.6%, yet the market was flat. And as I know, as we know, it’s really that tech kind of drove this market from a sentiment aspect during the month which has actually driven returns for the entire year from an actually tangible situation.

But, I think one of the big questions, we talked about this, I think, on the last three pointers, John Luke, was a lot of the questions that we get is like, “Hey, Dave, hey, John Luke, hey, JD, Brad, Beckham, what happens if the AI trade pulls back? Will the market also pull back?” And I think what you saw in June but now even more so July, it just shows you that the baton from a capital standpoint can get passed from one asset class to another. And John Luke and I hear this acronym all the time from our long-term trader, Mark Callahan. He says FREAM. The market is all about FREAM. And what does FREAM stand for? Flows rule everything around me. All right? I think it’s a playoff of the Wu-Tang, “Cash rules everything around me.”

And we know at Aptus, cash does not rule anything around you. It’s just a “safe asset class that loses money safely.” But, we definitely saw kind of a FREAM aspect in the market here in July as we saw the unwinding of situational awareness.

And what was the guy’s name, John? Leopold? Theopold?

John Luke

Leopold.

David

Leopold. So, I think I’m really optimistic about this market right now. It’s not going to come to a surprise of many, but we’ve gotten through earning season, which I’ll talk about here momentarily, and it’s been absolutely unbelievable. I think a lot of people have become more constructive on the hyperscalers, too, and the hyperscalers equate for, what, about one-third of the index as a whole, and you’re getting growth rates that are unbelievably strong. You have a market that’s kind of in a consolidation phase right now. We know that the old phrase, “Sell in May, and go away,” may seem a little true right now. I don’t think it’s made sense for the last 75 years, to be fully honest, because there is, I guess, a little bit of a seasonality going on in the market right now.

But heading into year-end, I’m pretty excited, even though we’re going to be seeing maybe some headwinds in the second half of this year that were not present in the first half of this year. And a lot of that comes from a sentiment-gauge perspective. I think that the conflict with Iran and higher energy prices could maybe cause some dislocation in valuation, or maybe there’s going to be a sentiment change around data centers, given the fact that we’re heading into a midterm election, and data centers are likely going to get politicized left and right by both Republicans and Democrats where the market may perceive that government is kind of a new bottleneck within the data center field.

I don’t agree with that opinion, but I do think that’s going to be very omnipresent or just present in this market because there’s enough bottlenecks already on building out data centers that the political side of it doesn’t matter. But, at the end of the day, as we always say, follow what the market’s telling you. And the market is telling you that earnings are great. The market’s telling you that economic profitability is absolutely unbelievably strong right now. And I think we can continue to be rational optimists in regard to the domestic markets here.

John Luke

Well, and I think the chart title kind of tried to wrap that up. It was a choppy month but a great finish and then a great start to August today to jump ahead a bit. But the two things that I’d say is, number one, one of the charts in the top three looks at the percentage of stocks above the 200-day moving average. So, the participation, the widening, the broadening of names that are actually starting to work, and I think it’s 73%, and it’s probably even higher after today. So, you’re getting more participation of just your average stock.

The second piece is just, when you look at the bond returns, another poor month giving away quite a bit of the income from the bonds in terms of the price degradation as yields rose. But, the one thing I’d lean on is high yield was almost flat. So, no blow-up in credit risk which I think kind of goes back to that broadening market theme. The market was more just rotational than it was any type of fear selling.

I’ll just show this one, I think, because it kind of hits on everything that we just said, but the blue line had manically gone higher for basically the entire year. So, it was due for a little bit of a pullback from any stretch of the imagination.

David

It’s kind of funny, John Luke, that people always speak about anomalies. And one of the anomalies that we have in the market is that the momentum trade tends to have … The worst month tends to be July. And what did we see on the momentum trade this year here in the month of July? It had an absolute pullback. Whether it was from old Leopold or the Korean market itself as kind of the driver, it just shows you that leverage was kind of a core tenet in that trade to really show a lot of that exuberance.

But don’t forget, even though the AI winners, specifically on the memory wall side of things, had a terrible month, they’re still up, in financial technical terms, a crap-ton so far year-to-date. As the chart shows, they’re up still about 22% year-to-date while the market is up, give or take, what, 10% year-to-date. So, they’re still driving this market. You just had a pullback right now.

John Luke

He’s probably right, but his risk management was wrong, and that’s costly.

David

He’s 24 years old, and he’s never run a fund before. Who would’ve thought that would’ve happened?

John Luke

I’d hate to be him today.

David

Well, he got married this past weekend.

You know who had a great weekend and a great last few weeks, though? Earnings for the S&P 500. And I think, if you are not becoming more constructive on the hyperscalers, you’re simply just not looking at the numbers. And I think a lot of people out there would still say a few things here. They’d say, “Dave, the hyperscalers, they’re not showing a whole lot of tangible, AI-related revenue here lately, so we’re skeptical on the CapEx spend,” or, which I’ll touch base here in a second, or they’ll say, “Dave, man, have you looked at what Amazon, Google, and Microsoft have put together from an other-income perspective?” What does that mean? The other income is basically these investments that Amazon, Google, and Microsoft made in Anthropic, they made in SpaceX, and they’re just recognizing it as some type of earnings, specifically after SpaceX just went public, and Anthropic had a few more funding rounds, where you could actually value the worth of their investments on the book.

They’re like, “Dave, that’s fake income.” I just absolutely disagree. It shouldn’t be an other income. It should technically be NOPAT, in our opinion here, but they still made a ton of money. But, even if you exclude this other income, you had earnings growing so far in this quarter at 25%. If you do include that other income from investments off balance sheet, you had earnings growth of 45%. Both those numbers are absolutely amazing from any historical standards. I mean, especially after you were growing earnings 10%, 15% one year ago, and just last month you had earnings growth closer to 20%, times are very good right now. So, that’s kind of attacking the latter contention a lot of people have with earnings.

Attacking the former, talking about, “Hey, Dave, when are we going to start to see some tangible ROIC on the CapEx that’s getting spent?” because a lot of people are now expecting CapEx to be about over $1 billion in the year 2027, and what I would tell them is look at Google Cloud’s revenue growth on a year-over-year basis at, what was it, 82%. Look at Microsoft’s Azure growth at 42% and 30 million seats on Copilot. Then, you just look at Amazon’s growth from an AWS standpoint. It was at 39%. They haven’t seen a number in the 30% for quite some time. But not only that are they growing AWS at 39%. You’re seeing them grow operating margins actually at a higher clip of what you saw last quarter.

Last quarter, you had operating margins on AWS 34%, 35%. This quarter, they’re at 39%. So, you can almost give them the 40/40 rule. Hey, well, they’re growing AWS at 40% with 40% operating margins. At that rate, I could care less what they spend. So, you are starting to see some tangible benefits on AI spend in some of these earnings, and that gets me, again, really optimistic about the domestic markets here.

John Luke

You got to be pretty bearish to bet against those companies after the track record that they have in place.

David

But the debt, the equity raises, it’s all noise. Their balance sheets are in better condition than the US government’s. I hope a lot of our individual balance sheets are a lot better than the US government’s.

John Luke

True. Well, I think that what you just said kind of hits on this chart which just looks at the dispersion of the individual components of the S&P 500, so how they’re moving together or how they’re moving separately. And so, the higher the number, the more dispersion that there is. So, that’s basically what you saw through earnings the last two weeks. Google was down 10%, Meta was down 9%, Apple was down almost 10%, but Amazon was up 15%. Microsoft was up over 15%. And then many of these names have actually moved back and pushed even higher after the earnings releases and the initial reaction. But, I think this chart just kind of illustrates that perfectly.

The dispersion of the market is money rotating from one stock to another. And I think what that means is, from a fundamental perspective, that companies are being rewarded for proving that they’re growing, proving that their margins are increasing, proving that their AI spend is actually turning it into profitability or at least a view of profitability.

And so, I would say that this makes things more challenging from a day-to-day perspective because you’ve got stocks that are moving all over the place. But, the inverse of this chart, if you look at the VIX of the market which is kind of looking at not the single stocks in specific but looking at the entire market of how it’s moving, and we’re at a 15 on the VIX. So, there’s very little fear when it comes to the overall market. But when it comes to the individual stock, it’s moving. And I think that’s probably something we can continue to expect moving forward.

David

John Luke, what you just mentioned, that individual stock vol is high, but the VIX is low which is one of the main pricing mechanisms for puts on the S&P 500 is very low, that sounds like that’d be pretty great for a hedged equity strategy that sold vols on individual names to buy puts on the market.

Secondly, you mentioned that Amazon was up 12%, 13% after earnings. Then you mentioned Microsoft was up 15% with some carry-on. Man, I know this really great bond fund out there that helps de-risk the bond sleeve of people’s allocation that definitely own calls on both of those names. So, hats off to anybody that is a portfolio manager on any of those strategies.

John Luke

Thanks, Dave. It was a good week last week. Great end of the month.

We already touched on this one. You have any more thoughts on our buddy, Leopold?

David

No.

John Luke

Good riddance?

David

Best of luck to the kid.

John Luke

So, I think we’ll finish the last two up with bonds. Obviously, last week was the second presser for Chairman Warsh, and there was quite the reaction to yields moving into the meeting and then after the meeting. But, I think one of the things that we’d like to point to is, yes, Chairman Warsh, his commentary, his process, his thoughts are going to be market-moving to some extent. But, when you look at how the 10-year yield is actually moving, it’s been impacted a lot more by oil prices. And so, yes, there are implications of less-forward guidance. Yes, there are implications of him not hiking rates and his rationale behind it. But, at the end of the day, if oil prices move up, it’s going to be pressure on inflation. If oil prices move down, it’s going to push and pressure inflation lower.

And I think that, while Chairman Warsh has done a good job, let’s cut him some slack. He’s done two meetings. We got spoiled with Powell where he would talk forever and answer everyone’s questions to a T. And it’s a little bit different setup, I think, moving forward under Warsh. And if he could go back, I imagine he probably would’ve spent a little bit more time focusing on the productivity from AI.

The oil pressure and oil prices impacting inflation are short-lived. It’s not something that we continue to expect moving forward. And then probably push back on some of the shelter calculations. It seems like home prices continue to at least flatline. We’re not seeing a whole lot of inflation there. And so, when you pull back the pieces of where inflation’s coming from, and as I’ve said a gazillion times, true inflation is still right around 2%. So, I don’t think that there was a political motive of not hiking interest rates last week. I think it was really fixated on the data’s moving in the right direction if we can get past the oil conflict, the Iran conflict, and the pass-through impulse on oil prices.

Dave?

David

I got lots of thoughts here, and this is from a dumb equity guy. You’re the smart fixed income guy. I do think that the market is telling Fed Chair Warsh that he should hike rates. What’s a 30 at now, John Luke? 5-spot 2%, 3%? The highest it’s been since 2007?

But, John Luke, talk about the dynamics of the yield curve itself. And I think it’s a very misunderstood aspect. That’s next. All right, let me say one thing before you get there then, John Luke. John Luke and I don’t really look at these charts before we go into this because you want raw thoughts.

But talking on Warsh, I thought he did a great job.

John Luke

I did too.

David

And it’s like a lot of the people that were calling for rate hikes in this meeting were not calling for rate hikes, what, 60, 70 days ago when Jerome Powell was still Fed chair. So, it seems very politicized because they are definitely getting something very different out of Kevin Warsh. And it’s something I actually very much like. Because people didn’t like Warsh. Anywhere on the media on TV, you’d hear people say, “Oh, he was terrible. He didn’t give us the answers we wanted.” Everyone is chasing Warsh’s reaction function. What a reaction function is, it’s just the rule that drives policy, whether it’s mathematical like the Taylor rule, which I don’t like. I don’t know about you, John Luke. Or, is it more gut-driven like Alan Greenspan’s approach? But, you basically combine that rule with a forecast, and you get your forward Fed guidance.

So, naturally people, since Warsh is new, they keep pressing him for this rule. Look at Dudley. Dudley, for instance, wants the Fed to publish its reaction function outright. I disagree. But my big point is, whose reaction function are we talking about? Warsh, he just took three to cents and calls that split a design feature. I think he called it a family feud. But that means that we no longer have 12 voters operating off of that one shared rule. We have 12 voters with 12 different rules. I mean, before Warsh can hand us his own function, he has to settle on that metric behind it. That’s why he has the task forces. But even then, once he gets his reaction function, we’re still missing 11 more to fully understand the Fed.

And John Luke and I are right in a musing right now, and this is our take on it. For years, markets, they’ve essentially been spoonfed the rules of the game rather than being forced to reason through it themselves. And that tells me how dependent participants have become on being told what to do rather than thinking for themselves. But luckily for us now, that dependency, it cuts both ways. If you can get ahead of what the Fed’s next move is and call it correctly, that’s where some real money was made. That is how a free market works in my mind. I love free-market capitalism. And before, honestly, we weren’t getting that out of the Fed because everyone was … The Fed forecasted what they were going to do.

Now, you go back to the timeframe of all of 10 years ago where we didn’t have the SEPs, we didn’t have these rules of engagement, what Warsh is doing isn’t new. The Fed’s operated like that a very long time, except during Bernanke, Yellen, and Powell.

John Luke

No, you crushed it. We want a market that reacts to the economy, to the actual market, instead of a market that reacts to what some bonehead at the Fed tells them to believe. And if you think back on the Fed’s record long-term, it ain’t great. So, I’d say that the sort of wisdom of the crowd of the market is probably a lot better gauge of what to expect than the wisdom of the Fed.

So, I love what he’s doing. I think it could lead to some more bouts of volatility. But, honestly, I think that’s good because it’s like the old saying on forest fires. If you have a few controlled burns to come through the forest and try to cut down of the undergrowth of stuff that could get really ugly, maybe if you do that, you alleviate the actual big forest fire that gets really nasty. So, I’m hopeful that this process has some strong repercussions for Fed reform that are really beneficial for our economy moving forward.

David

Well, Warsh said, “Hey, talk less. Think more.” That is the number one rule he wants to focus on for all the Fed governors. But, John Luke, all these Fed governors are paid $50,000 to $100,000. This is something you told me the other day. $50,000 to $100,000 every single speaking engagement. And if they can’t say, if they have to speak less, then they’re not getting paid their $50,000 to $100,000 of speaking engagements. What is this? It’s a principle agency problem, almost, in a way.

John Luke

Poor guy.

David

And I think that’s why volatility last week because all these Fed chairs were trashing Warsh and talking about what their reaction function is, what they should do then. That created the volatility. I truly believe that we are actually going to get more of a team approach at the Fed now than we had before because you have 12 different reaction functions. You have people dissenting.

What Brad and I always talk about when we do OSCVI investment committee meetings when we pick stocks, we want to have spirited yet collegial conversations. And I think you’re getting to get that more here now, and you’ve seen the fact what people are dissenting.

John Luke

Last thought on it. If you get two more inflation reports that are hot and not showing any improvement, I would bet that Warsh will react in September, even with the elections coming up.

Where we cut into the last time election cycle, we might actually hike into this election cycle, but we’ll see. I think the bottom line is the curve is steeper which has, I think, better implications for the market and more of a normal structure. But, Fed policy’s higher. It’s higher than it was the last cycle. It has come down a smidge. The neutral rate for where the economy’s growing is higher. We’re in a higher nominal GDP environment. The last report, if you annualize based on the quarter, was 7.9%.

Inflation’s been running a little bit higher, and there’s a term premium because we got $38 trillion, maybe 39 now, of debt that’s in existence and has to be refinanced. So, I think this shape of the yield curve, as you can see from the red dots here, it’s a little bit steeper. It’s a little bit higher. I see no problem with that and no problem with the economy’s ability to withstain a slightly higher yields and a steeper curve.

David

John Luke, would you agree with or disagree with my next statement? I haven’t asked you this one yet. Before, the market was under the rule of monetary policy. It feels like it’s now more under the rule of fiscal policy.

Would you agree or disagree? One sentence.

John Luke

It’s certainly driving things more now than it has been the last several years because there’s no pathway to improve it. We’re going to continue having 5%, 6% deficits.

David

And that’s why you’ve had the rates specifically on the long end of the curve, as you see here, I think, move higher. And that makes us, as investors … I think we need to think about allocations differently because of that. It’s more under a fiscal rule of running 5% into 6% deficits as a percentage GDP versus monetary policy, meaning that rates on the longer end of the curve are likely going to stay higher and elevated for longer, and they’re not going to come back down as much as people just expect specifically during more periods of volatility. And I think that’s where you got to reimagine and rethink what you do at the allocation level and how handcuffed you are to fixed income.

John Luke

I mean, if you can run nominal GDP at eight and hold rates at three and a half, what happens to your debt problem? Well, you kind of grow your way out of it, erode the value of the fixed-income holder, and I think that’s ultimately the playbook, regardless of how Warsh … It’s really the only solution at this point. We have to grow our way and somewhat inflate our way out of the debt problem. And I see that we’re making strides to it, but the beautiful thing is stocks are priced on nominal terms, nominal growth. Earnings grow in nominal terms. And so, I think you continue to see stocks benefit from the backdrop.

All right.

David

Stocks for the market. Hey, thanks for everyone listening today. Have a great end of summer. Hopefully, your kids get to back to school safely so you can get back to more of a regimented schedule at home. God bless everyone. Thanks so much for your time today.

John Luke

Bless. Thanks, Dave.