Aptus 3 Pointers, August 2026

Full Transcript

Derek

Welcome. We are 40 minutes after the finish of August and the crew is on it. Getting right into the wrap up of August and into what we’ll see in September ahead. Dave Wagner, head of equities, John Luke Tyner, head of fixed income, doing our usual thing. I missed you guys last month, but obviously did perfectly fine in my absence. Let me just go through the disclosure, which is my grand contribution to this. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

More information about Aptus’ investment advisory services can be found in its Form ADV Part 2, which is available upon request. So it’s funny, the market feels kind of choppy, but it was another good month in general. I think people worry about the market, but you look in the rearview mirror and it’s up. There’s plenty of reasons for it to go up. We’ll talk through some of that stuff, but you have the numbers, which I think these are through yesterday. Today didn’t impact it a whole heck of a lot, but I don’t know, fire away. What you got here?

David

Yeah, these returns are as of yesterday. I will have them updated on the developments piece that goes out next week or later this week, pardon me. But you’re right, Derek. There’s a lot of worries out there right now, and I think John Luke and I can attest to that for the number of inbound emails of the different laundry list length of things that could potentially happen to this market. But I think the best way to describe this past month is exactly what John Luke and I have been speaking about for quite some time right now. Just getting back to the simplicity and basics of this market, because if you focus on those things, I think you’re going to keep your head on straight and keep your clients invested through those maybe short bouts of volatility that we may see through the end of the year. But earnings were kind of the name of the game during this past quarter. They’re unbelievably strong, and I think that’s why you had risk assets, specifically equities, perform quite well.

And we’ve had a string of months here lately where markets have performed very well, or at least there’s been that tagline that they’ve been very resilient. I think that’s very much the truth right now because there is a lot of headline risk out there. I think there’s going to be even more headline risk as we proceed through the second half of next month. I mean, I’ve got a lot of questions here lately just on midterms. I would say that investors and markets tend to focus on midterm elections really after Labor Day, and we’re coming up on that quite quickly. And then you add into September tends to see specifically the last two weeks is the worst two week stretch for markets over the last 100 years, the last two weeks of September. So I think we do have some seasonality, maybe headwinds coming up here over the next few weeks, but I don’t think that these anomalies are as monolithic as many people say on TV. It’s because if the markets are weak heading into September, that tends to bode for continued weakness in September and October.

But when markets are actually strong heading into September and October, it actually bodes quite well for markets. Obviously, I think we all know the wrench that gets thrown into the spokes of the bicycle tire is going to be midterm election because there’s going to be a lot of sentiment issues that we’re going to have to navigate specifically around data centers. This is something John Luke and I have talked about for quite some time is that we’re firm believers in the CapEx surrounding data centers and the revolutionary technology with artificial intelligence. But we’ve already seen here lately that data centers are getting politicized and while that may not transfer over to actually slowing of CapEx or slowing of profitability benefits for the CapEx spend, I think there’s a sentiment overhang that could create some type of choppiness here in the near term. But again, markets are strong and if we focus on the basics of this market, I can only expect them to remain strong because earnings and profitability just continue to be off the charts.

Derek

I mean, the elephant in the room, and I’m sure it’ll get discussed through this, but I’m just looking at the numbers and you probably get sick of hearing us talk about more stocks, less bonds, but man, every timeframe that matters, just like I’m looking down at that aggregate bond and investment grade bonds row and it’s just so bad, years and years of massive compounding missed out on if you’re too heavily weighted there.

John Luke

Yeah. And then you scan and you look at the 10-year number on the NASDAQ and it’s just incredible. And in an environment where the textbook would’ve said that tech would’ve underperformed with rates going from high to zero and then back up to the modern day high, and that just hasn’t been the case.

David

Well, it’s what we always talk about, John Luke, the bond markets are focusing on something different than what the equity markets are focusing on right now. Equity markets are focusing on earnings and profitability while the bond market is really focusing on the fiscal deficit that we’re running here in this country and then reintroducing that term premium.

Derek

Well, one thing we know is that the terminal value of a bond cannot, will not increase, but I guess stocks can based on a chart like this.

John Luke

A good lead in.

David

I always quote Larry David that it’s pretty, pretty good, but it continues to be pretty, pretty good. And I sent to Mutti now, I think it was last week, bifurcating the earnings and the narrative around earnings right now. I think there’s been a lot of misconception on the numbers. Meta, Microsoft and Amazon, they have a lot of other income coming in from their investments in Anthropic and SpaceX that I think are inflating the numbers a bit, but they’re inflating from numbers that are already very strong. So there’s two ways to look at earnings over this past quarter was that you had S&P 500. In my mind, I think the right number to look at from an earnings growth perspective is about 32%. If you include that other income for those three stocks in regard to their investments on SpaceX and Anthropic, that number’s close to 52%. I don’t think I’ve seen a number like that.

Actually, I know I’ve never seen a number like that from an earnings growth perspective outside of coming out of a recessionary bottom. It just doesn’t happen. It just shows you the strength that we’re having here right now, and it feels like we’re more mid-cycle right now. We’re still getting this unbelievable earnings growth, and that’s off the back of 15% revenue growth for the S&P 500. If you strip out the hyperscalers and some of the AI adjacent stocks, you did see earnings growth for basically the S&P 493 of, there’s about 15.7%, so still very, very strong. I think I’ve seen a few charts that show when profitability is increasing to the extent that you have right now, when you have earnings growing to the extent that you have right now, it’s very difficult for the market to get into some type of trouble.

I do think that the market is going to have to digest at a point the slowing of earnings growth. And that’s not because earnings growth have really slowed down, it’s just that the compares, the comps become so much more difficult moving forward on a comparable basis just due to the law of large numbers. I mean, if you grow earnings at 32% in one year, one year out from right now, we’re likely not going to be growing earnings at 32%. It might pare back to the 15% that we’re expecting to see earnings growth in 27 and the 16% in 2020. That seems very much more reasonable. I think that could cause maybe the market to have some type of hiccup as it digests that slowing of growth that’s already above historical trend line. But everything right now from a fundamental perspective in this market is absolutely amazing. I think it’s such a great reason to be optimistic, not just today, but still moving forward.

Derek

Yeah. And getting over on the fixed income side, I mean, this is the only kind of growth you can find there is that yields have gone up a little bit, but it’s not just the US. So JL, I guess everyone’s spending money and bonds aren’t that attractive anywhere.

John Luke

Well, I think that there’s a world of fiscal problems, not just in the US, but across the globe, and you’re having to entice investors with higher yields to get them to allocate to bonds. And a lot of that has to do with the place that bonds sit in a portfolio where it’s changing. The last five or six years is a completely different environment than it was the last 40. And so folks are requiring more return in order to fight that, bonds are probably going to be more volatile. We’ve seen bonds up in terms of yields on days whenever that stocks have been down. So bonds down in price, stocks down in price on the same days. And so from a portfolio construction perspective, that’s a scary environment.

People have a lot of memory of how bad 2022 was when your bonds were down about as much as your stocks, and if you were long duration, it was really down. But what you’ve seen across the globe is that overall growth has really held up much better than what folks anticipated or thought. But the counterside of that is inflation has also been much stickier than what folks thought. And a lot of that has to do with supply chain issues. A lot of that has to do with oil prices. But basically anywhere that you look, and you can go through each of these individual components, but nominal GDP is running hot for many of these countries. And if you think about where the 10-year yield should trade, well, it should trade pretty close to where the nominal GDP is running. So that’s real growth plus inflation.

Well, if real growth has held up even with higher rates and inflation’s been more like 3% instead of 2%, then that’s how you get bond yields in the four, five, 6% range for a lot of these countries. And what I think goes back to that first graphic when we were joking about the NASDAQ versus bonds is it just appears that the market in general, and there’s some exceptions, but the market in general is much less interest rate sensitive than what people would expect. And there is probably a breaking point at some point, but up till this point, the market’s been heck of resilient compared to higher yields.

David

John Luke, I got a question for you on that one. What are your raw thoughts on what Scott Bessent did with his version of the Fed’s operation twist?

John Luke

Yeah, I mean, there’s definitely mixed thoughts on it. I think there’s some maybe mechanical clarifications that need to happen in terms of what a buyback solution versus what is QE. And if you’re taking duration out of the market to replace it with T-bills, that’s definitely more stimulative than some of the other mechanisms that are happening. So typically the buybacks would work is 10-year bond gets issued, a year and a half goes by, it’s eight and a half year bond. There’s not a huge market for 8.5 year treasuries. They buy back the 8.5 and they reissue a 10 or they reissue a seven, and it’s not really a huge change in the duration impact of the market. But with this, it’s buy a 10 year, a 20 year or a 30 year or the in between years and you replace it with T-bill. And so it’s definitely more stimulative to market than maybe some of the things that we’ve experienced in the past.

And I think that’s probably why you have seen gold rally generally kind of a positive for stocks where… And Bitcoin can’t leave that one out. But that is another play call in the debasement playbook that we’ve continued to talk about. I’ve heard a few things where people were pointing fingers at Scott Bessent and saying that it’s his problem. At the end of the day, the problem is Congress, right? We’re running 6% deficit. It ain’t his problem. It ain’t his fault. It’s his problem that he’s having to deal with and find solutions for. So I guess my question is at what point, if ever, does Congress have to tighten the fiscal belt? And that’s one I don’t have an answer to, but if the 10-year was at six or seven, I bet they would.

David

Well, if they keep getting bailed out by the Fed buying treasury to increase their balance sheet, they’re going to continue to spend.

John Luke

Yeah. Yeah.

David

I think here’s one for me, John Luke. Tell me if I’m wrong here. I haven’t fact checked this one, but everyone is so up in arms with some of the stuff Scott Bessent is doing, whether it’s what he did with the yen by selling the euros saying, “That’s not in the playbook. You’re not allowed to do that.” And the same thing here with him doing this operation twist on the treasury yield curve. I think they will forget that Janet Yellen did this exact same thing in 2024, yet there was no news headlines in it. They’re both in a midterm election year or election term year, so it shouldn’t be thought about as it’s politicized that Bessent’s trying to do this to stimulate the market because Janet Yellen definitely did that too in 2024. So I think people forget about that, that they just think that this is something new under this regime, under this administration of financial engineering manipulation when it’s actually been happening quite a few times before.

John Luke

Yeah. And Scott Bessent’s a legend when it comes to FX trading, and he had a pretty scathing note to Elizabeth Warren. If you didn’t see that, you should give it a quick read where he basically tells her that everything that she said in terms of what he was doing was just flat out wrong in terms of the technicalities of what it was, what swaps were with other countries. So I do have some faith that he’s trying to do the right thing, and I think it’s a tough hand. It’s a tough hand to be dealt whenever that you have 40 trillion in debt, 32 trillion in public debt, the Fed balance sheet, what it is, fiscal deficits running what they are.

I think his ultimate hope is that you see some type of productivity miracle and a quick and fast drop in inflation that allows the Fed to cut rates. I think that may be what folks are sort of underestimating is if we do see massive drop in the price level and inflation and oil prices and things like that, that the Fed, if they were to cut rates 100 basis points or 200 basis points, you would watch the interest expense number have a complete nose dive down from an interest expense perspective. And that might be what he’s hoping for, but obviously hope is not a great strategy.

David

I just want him and Druckenmiller to be friends again. That’s all I want out of this, JL.

John Luke

Yeah, I wonder about that article, but…

David

I get it. I mean, that bodes right into this chart here right now because obviously the Fed has two different mandates, John Luke. While most global economies, they just have a single mandate on inflation, we also have a dual mandate that includes labor. Obviously labor’s at full employment right now, 4.1% unemployment rate. But John Luke, I think this is the chart that the market’s trying to figure out a little bit more because you are starting to see PCE, the Fed’s preferred measure inflation kind of tick higher, even though CPI, what the market tends to look at has been coming down.

John Luke

Yeah. So you got a pretty good update I think from Chairman Warsh at Jackson Hole last week. I think he rebuttaled many of the negative comments that he received post the July FOMC where he probably came off a little bit soft on inflation and just the Fed’s kind of perspective on what drives things from here. But yeah, this chart’s a good illustration of the core PCE, which fits about 3.3% year over year versus the core CPI, which is the blue line, which fits about 2.5% year over year. And what you’ve seen is over time, and if you brought this chart back, which we’re going to put out a blog to go through some of the misnomers of the difference because there is quite a few technical intricacies of how the two calculations are done. But if you go back in time, these lines have tracked much more closely together than what we’ve seen right now. And actually core CPI is usually about 50 basis points above core PCE.

And right now, we’re an 80 basis point delta in the other direction. And the biggest take it of that is because 41 odd percent of the core CPI calculation is from shelter price, while only 17% of it is within the core PCE number. So you’ve got quite a big difference there from the shelter calculation. And I think if you wanted to know, all right, which metric is the best one, I think the core PCE probably gets a better idea of the level of embedded inflation in the economy and the core CPI is a household level inflation gauge. And so that’s the key difference of how I think about them. Now, a couple caveats. So Warsh was really big on the trimmed median and mean CPI calculations. So he likes the Dallas trimmed mean PCE, which is about 2.3% right now. The Cleveland Fed median PCE is 2.7. And then Truflation, which we’ve mentioned a number of times over these three corners, is about 1.55% as of this morning.

So a number of those are lower than where core PCE is currently. Now, Chairman Warsh did commit to sticking with the core PCE calculation at the Jackson Hole meeting, which I think was good for the market because there was a question of, “Well, is it two point something or is it exactly two?” And he laid down the wall that it’s two. Now, one thing that people probably don’t know is the inflation target is broadly 2%. It’s not specifically tied to one of these individual tracking index. So what you could have is a situation where we’ve got a task force for that, as Chairman Warsh said a couple meetings ago, where he committed to this PCE for the rest of the year, but he hasn’t necessarily committed to it forever. And so I think that could be one thing that gets dusted out over the next few months and into next year where maybe the 2% target doesn’t change, but the mechanism that they’re looking at more thoroughly does change.

So that’s my thought. But if you think about core PCE, it’s only had a downward revision year over year in two of the last nine months. And so it’s definitely sort of flatlining to inverting higher, even as we are getting good progress on the CPI number. So I think as you look at the September FOMC meeting, which almost went from no chance of a rate hike to about 60% chance of a rate hike, there’s also about two rate hikes priced into the market before next April. But I would say that this meeting is live. We won’t get another PCE data point because it doesn’t come until the end of the month, but we will get the labor number, I think on Friday. Is it still on Friday, Dave, with the holiday? Yeah, still on Friday, and then we’ve got another PPI and CPI number. So I would say that the bar is probably pretty low in terms of those numbers need to come in fairly low in order to not get pressure for a rate hike later this month.

David

You think we get one?

John Luke

Probably. It looks like it. It looks like there’s enough consensus around getting this hike and 25 basis points doesn’t really mean squat to equities. Maybe there’s some negative signal there. I don’t know. But I think if he does hike, he locks in that he’s not playing around and it’s another way for him to buy some trust from the market.

David

Yeah, I’m with you on that one too. I do think we get a hike. Obviously, Waller and Powell are the outliers here, the unknowns that really could be the swing votes. The thing that gets me is whenever the Fed has started to tighten, it tends to be 250 to 300 basis points of tightening tend to come alongside that. I don’t think that’ll be the case here. This might be an outlier that it’s something that me and you, John Luke, have talked about for a while. If we do any movements in the federal funds rate, whether it’s cutting or hiking, it’s more of a recalibration than a change of regime, but it’s 25 bips. We’re growing earnings at 30 something percent profit margin. It’s okay to do 25 bips points. It’s not going to derail the market.

John Luke

Yeah. And last comment and then we’ll jump from it. I think it’s been in the news. People have been anticipating this meeting for a long time. I think Warsh did a great job. Overall, we put out a note on it. But in terms of what this means for market, it’s not much in terms of the labeling. But because we aren’t getting the forward guidance that we were used to getting, say, the last 15 or 20 years, if you look back to the history of the Fed and rates moved 40 years ago, 30 years ago, 50 years ago, there was a lot of one-off adjustment. And that recalibration I think is ultimately a good thing for markets moving forward because it keeps markets on it, and I’m hopeful that that leads to better outcomes.

Derek

Yeah. And you talk about 25 basis points here or there, and when you think of the Y axis of both the earnings growth and this here, the Mag 7, which really hasn’t been anything magnificent of late, the rest of the market’s done a pretty good job of picking up the slack. But I mean, you’re talking about significant growth all across the technology universe. 25 basis points is not going to probably impact that a whole heck of a lot.

David

The investment is here, it’s here to stay, and it’s going to continue, and 25 bips ain’t going to stop this train here on this chart. I will say I am data mining with this chart, so I will give the disclosure, but I think with any chart or table, everyone’s probably data mining. But we know that the Mag 7 free cash flow has had a lot of eyes on it because you’ve had free cash flow for a lot of the Mag 7 companies go negative over the last quarter or so because the CapEx investment is so high degradating free cash flow. But what we’re starting to see is that the year-over-year percentage change in free cash flow for the Mag 7 companies starting to turn up. Where I’m data mining is that a lot of the free cash flow growth is actually just coming from two of the seven stocks. It’s coming from NVIDIA and it’s coming from Apple. But we know that all these stocks aren’t always going to work in the same exact direction.

And I still think that this is healthy for the overall market, because if you read my musing, I think I call it leveraging the cloud, I wanted to delve into the myths that we’ve seen from whether it’s from a credit default swap perspective on a lot of these Mag 7 companies having a CDS higher than the markets up, which doesn’t make sense to me whatsoever. I think that’s probably driven more by Oracle and their CDS, but I’m not too worried about this free cash flow narrative right now. I just think that the market’s already priced it in, because if you remember, we started this year at a valuation of 22 times forward earnings. As of today, given the amount of earnings growth, we’re actually now 19 and a half times forward earnings for the S&P 500. And we’ve known that the market, specifically here in the US, has absolutely loved our economy, the S&P 500 becoming more asset light and a lot more free cash flow generation coming from these companies where it’s yielded a higher valuation.

But given the amount of CapEx and investment that we’ve had and the market slightly turning a little less asset light and a little bit more asset heavy given this data center narrative, the market re-rated itself lower from that 22 times at the beginning of this year to 19 times now. But the reason that I think I’m optimistic moving forward is that we have seen some companies like what Microsoft did this quarter, what Amazon did this quarter, unbelievable reports, really showing some type of return on invested capital for their CapEx spend in the cloud in regard to data centers and to AI. I do think that if we can really start to show on a consistent basis some type of return to profitability from this CapEx spend, creating some type of free cash flow generation, you can get that 19, 20 times multiple in this market to be higher than the high water market that 22 times.

I think people would be willing to pay 23, 24 times for that type of market if we can transition this CapEx spend into free cash flow and into profitability, which I’m a believer in. It may not happen this year, may not happen next year. In ’28, we’re expected to see free cash flow be substantially positive for all the Mag 7 companies, and I think that could be the catalyst. So I’m very excited for the spend that’s going on and the return that we’ve seen on some of that spend. Obviously, we’re just one or two quarters into that. I do think that trade has some legs and I think it makes me even more excited for risk assets right now, specifically domestic stocks.

Derek

I guess we can get agreement from the bond guy and the stock guy on this one.

David

Yes. It’s a great start.

John Luke

CapEx to profit.

David

Yeah. We’ve been talking about, hey, you know what? The simple-minded person in this market tends to be right and they focus on the simplicities of earnings growth and profitability growth. The data’s undeniable, and this is one of my favorite charts out here, and it just says that we’ve never had a recession with profit growth positive on a year-over-year basis. That’s what we have right now. I think there’s a lot of reasons to be optimistic right now from a fundamental side. I think there’s a lot of noise out there and a lot of political jargon that puts everyone’s brain in a pretzel, given the news headlines change on a day-to-day basis. But again, the best investors out there can look through the noise, not pay attention to noise, and really just focus on the prize and focus on actually what matters and what matters is asset allocation at the end of the day.

John Luke, I’ll pass off to you to talk more about that. But John Fox on our team, CFA, I call him John Legend because he’s that good. He created this report, and if anyone listening to this call wants to see it for their custom asset allocation or even our off-the-shelf model with the impact series, it really delves into the effects that we’ve had from an asset allocation perspective, really driving returns at the model level, at the allocation level, and it’s a beautiful report.

John Luke

Yeah. No, I would just say on this chart here, I think if you want an example of AI productivity, if you look at margins and you look at profitability, and this is a wider cast net of profitability and margins than just the S&P 500, a lot more businesses included in this group. And so I’d say that from my perspective, if we’re looking at a use case for companies to deploy AI at scale to make their businesses better and more efficient, that this to me is showing that that’s happening. I don’t know if you disagree, David, but when people are like, “Well, it’s wasted money or wasted [inaudible 00:30:00], I’d say the numbers don’t say that.”

David

Yeah, I’m with you. Derek, the only question I have for you is…

John Luke

But another great month just to keep your head down. Another great month just to keep your head down. NASDAQ’s up 4%, S&P’s up 3%, kind of everything. International did well, EM did well. Yeah, there was some noise in July, but I think another case study for just sticking with your plan, sticking with your asset allocation, more stock plus bond, and we’re in an environment where I think that will continue to benefit asset owners.

David

Derek, I’m going to send you some red solo cups because I see you drinking out of a blue one right now. Being a Toby Keith guy, I don’t know if I can have that on these calls.

Derek

I thought about it as soon as I put it up for the first time. It was what I could grab in a hurry. Well, thanks guys. I know people find this helpful to get through the noise because there is some… I was talking about someone else. The media has to put out the same amount of news every day. So whether or not any of it matters, the paper’s the same size. And I know papers from my terminology, but even websites, everything, they got to fill the site with news. And so a lot of it’s just noise and you guys have done an amazing job of just keep blinders on. Earnings are going up, spending is going up. This is the way that financial assets have to go. Yeah, there’s going to be changes day to day, week to week and all that, but the big picture is rolling along. So appreciate you articulating.

John Luke

Thanks, DeHern.

Derek

All right guys, we got a few days of some heavy work and then everybody’s probably ready for long weekend, some good football and into maybe a little bit of fall. We won’t get fall quite yet here in Charlotte or in Fairhope, but Dave, you might get a little taste.

David

I bet.

Derek

Awesome. Thanks guys.

David

Appreciate y’all.

Derek

See y’all.