Aptus 3 Pointers, February 2026

Full Transcript

Derek

Welcome. End of February. Today is the 27th, it’s Friday. The market’s going to be closing here this afternoon. Been a wild month, although the market’s pretty much where it started, if you just looked at the S&P index. We’ll get into some of that. But have Dave Wagner here, head of equities at Aptus, and John Luke Tyner, head of fixed income. Thanks for coming on, as you do every month. Appreciate that.

John Luke

Awesome.

Derek

We’ll pop through a few of the charts that y’all have selected, and maybe just give us a little perspective on what’s going on out there.

And let me do the disclaimer. 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’s investment advisory services can be found in its form ADV Part 2, which is available upon request.

Always start with the monthly recap. Like I said, it’s kind of just a hilarious number at the top. S&P, flat for the month, pretty much flat for the year, but a lot of other numbers on that sheet. So maybe you guys can… Dave, you can walk us through some of that.

David

Yeah. John Luke, I don’t know about you, but I’m ready for the month to be over. I feel like at the end of every single day, I’m just in a dark room putting on lipstick, looking out the window at a light pole in the street. Because it’s been a wild month. And the top number, Derek, that you just alluded to, the S&P 500, basically flat for the month of February, and slightly up for the year. It doesn’t feel like that whatsoever.

And I think this bottom chart here that we have kind of exactly shows you that. It basically just looks at the leaders of the year and the laggards of the year. So the chart’s looking at the best 50 performers in the S&P 500, and it’s subtracting out the worst 50 performers in the S&P 500, which is probably like y’all’s software. And it’s just showing you the craziness that we’re seeing underneath the hood of the market right now from a volatility standpoint. That volatility that we’re seeing from underneath the hood of the market, it has not transpired into index volatility.

And a question I’ve been getting a lot lately is like, “When is it going to occur?” Because I do believe a lot of people, and John Luke, I want to know your opinion on this too, because we know Mark Artrader’s thoughts on this, but they all say that the volatility underneath the hood of the market, it is going to hit volatility at the index level and bring down the market. I’m not sure that’s the case. I think that we’re basically seeing a five to 10% pullback in the market right now just underneath the hood, and it’s kind of resetting the sticks from a leverage standpoint. It’s kind of cleansing our sins from over leveraging into some speculative risk assets. So I see it as a reason to be optimistic actually moving forward because what’s going on underneath the hood of the market is it’s just a change of the guard.

It’s a change of the flow of capital underneath the hood. And as you can see, S&P 500 is flat. NASDAQ is slightly down on the year, but then you’re getting the more cyclical stocks, the smaller market cap stocks, the average stock doing really, really well. And we’re actually talking more about that here with a chart a little bit later on in the slide deck. But I think the things that stick out the most to me right now is the performance of small caps really starting to work here. I think the performance to EM has definitely continued, but overall, a lot of the factors that worked last year in the year 2025, they’re definitely still working actually I think here in 2026. And I’m not going to say it’s welcomed or unwelcomed, but the momentum has definitely continued. Before I give it to you, John, should I say something?

I think the last thing I would say here is that I keep getting told at this market that there’s a lot of chaos and there’s a lot of turmoil out there. It’s hard for me to believe the market is flat year to date and we’re through two months of the year. That’s okay. But if you believe that there’s chaos out there in this market, if you believe that there’s turmoil out in the market, go back to the basics. Get back to the basics of this market, and those basics are growth and the margin profile of the market. The market is seen… Don’t tell me there’s a growth scale. There’s not a growth scare. You’re having GDP run at almost 5% on a 5.5% on a nominal basis, 2.5% on a real basis. You had the fifth straight quarter in a row of earnings growth being greater than 10% for the S&P 500.

That’s a record. There’s growth everywhere in this economy. There’s not a growth scale right now. But even if you look at profit margin, the second thing that you should look at to get back to the basics, it’s unbelievable. Not only are you seeing the S&P 500 operating margin and growth margin increasing, you’re also seeing the average stock here in the US and witnessing their profit margins from an operating level also increasing. Things to be very optimistic about. Doesn’t mean that we can’t have a pullback by any means. Pullbacks, they’re normal and they’re healthy, but I just don’t understand the chaos and turmoil conversations being thrown around right now, especially when you look at a table like this at the top and see pretty good returns.

John Luke

That one-year number jumps out because even with the drawdown from last year in April, just shows the resiliency of the market through a lot of noise. We’ve been here plenty of times before and pretty much always has worked out the kind of same way. People get over fearful of what could potentially happen and they maybe forget what’s actually happening underneath the hood, and there’s still a lot of positives going on. I think it kind of segues nicely. The bottom end of that chart just showed fixed income returns. As we talked about the last car or the one before, great returns for bonds in 2025 across the spectrum, the ag, high yield corporate bonds, anything in that three to seven-year duration has performed well as rates have moved lower. And what we’ve seen after a little bit of a choppy January was a substantial decline in yields across the entire curve in February.

This graphic just shows treasury index returns month by month, and you can see it’s one of the biggest spikes, the green bar to the upside for treasury returns. The last one that we saw was actually, ironically, last February where treasuries had a nice spike before the tariff tantrum. But I think if you think back to what Dave said, nominal GDP is growing. The Q4 GDP number came in weaker than expected, but there was a shutdown of the government that impacted a lot of government spending, and the bulk of that was actually related to negative number from the government side into the calculation. And so if you look at the Q2 and Q3 GDP numbers from last year, both of them, one was almost at 4% and the other one was over 4%. And so I would imagine that this number probably gets written back up.

So you’ve got yields dropping because there’s the Iran situation. Geopolitics is a hotbed right now, and it has been a hotbed, and it probably will continue to be a hotbed. You’ve got the AI scare, and part of the AI thing is the benefits of productivity, which hopefully allows the Fed to reduce rates because people can produce more with less things, less inputs. You’ve got inflation working lower, 2.4% year-over-year inflation number, which I’d say is pretty, pretty good, a lot better than what a lot of people have expected. And you’ve got a labor market that’s not declining, but it’s not necessarily growing at the clip that we were at least after COVID. And I think there’s a lot of factors that are playing into it. If you look at where the market’s pricing in cuts for the remainder of 26, it’s roughly two and a half cuts priced in.

So we’re kind of at the upper end of the spectrum of what we’ve seen thus far this year, and now you’ve got a new Fed chair coming in May pending anything crazy happening. So I think that the move in treasuries is probably a little bit overdone just because I do see a situation where inflation probably is closer to 3% than it is 2%. That doesn’t necessarily mean that the Fed’s not going to cut rates. And one of the things that’s been, I think, surprising to me is coming into this year, everyone was talking about a steeper yield curve. They thought that as the Fed brought the front end lower, that the long end would at least stay sticky if not even rise potentially with term premiums and potential for more inflation or whatever that was kind of baked into it. Well, you’ve seen a little bit of that steepness come out of the curve as longer end, the longer end has declined a little bit, but I really wouldn’t get too sucked into it.

I think that the environment of the 2020, the decade of the 2020 is going to continue to see a mishap between stock and bond correlation from what we saw the last 30 years. And so while the market loves to rally the long end of the curve at any inkling of economic weakness or whatever, just remember that when we’re running five or 6% deficits, they might even be higher depending on the tariff ruling and how much of those refunds have to go out the door. It’s just going to be really hard and it doesn’t really make much mathematical sense to lend the government at 10-year money at less than 4% when inflation’s running where it is, when deficit’s running where it is, and there hasn’t been the protection level for bonds and portfolios that folks are relying on. So I would not be surprised if we get a red bar in here in the next couple of months for treasury yields.

Derek

Yeah, I mean, you rattled off a few things, and I think as you guys talk more, just looking at what charts you have in here, maybe the picture becomes a little clearer, but there’s no clear playbook here on why any connection between some of the moves that have gone on of late, these yields going down, small caps going up, merging markets, it’s all over the board. The only thing that’s clear is the software thing that you guys will get into a little bit later. But yeah, interesting, interesting market out there.

David

It’s-

Derek

No, go ahead.

David

It’s definitely taking a shoot first and ask questions later type of mentality. And I think that’s why a lot of people are having difficulty or at least talking about chaos in this market because think about the technological advancements that we’ve seen over the last, call it just two months. It’s probably greater than the amount of advanced computing technological advancements that we’ve seen in the last two years. Obviously when it comes to advanced computing on a technological perspective, there’s a non-linear path up, there’s an exponential path up, and that’s kind of what we’re seeing, whether that baton gets passed to adoption rates, which likely will not come at a non-linear or… I can’t say the word, non-linearly type of pace, that’s going to be the big question of the market moving forward. But it definitely fades well into this question here is that a lot of people are becoming skeptics of the tech space because of that adoption perspective or, hey, the return on profitability of some of the absolutely large CapEx numbers we’ve seen out of the hyperscalers so far.

I actually like that. I like that number that’s coming out. I think it’s unbelievable by how much it’s increased just since January. Again, I’m on the side that I would like to consider myself a rational optimist, that I do like the increase in that spending right there and I’m not worried about it, but obviously the market disagrees with me because think of all the valuation compression you’ve seen on the top half of the market, specifically on the mega caps. So this chart on the left, it’s basically just speaking to what premium, the average PE of the Mag 7. And by that I mean not Tesla, it’s actually including Broadcom. So the top seven stocks and the S&P 500, and what’s the average next 12-month PE of those stocks then compared to the price to earnings multiple of the market, i.e. the S&P 500. And we’re starting to dip down into rarefied territory that the premium isn’t that large.

The premium now is only about 20% greater than what the S&P 500 is trading at. And that’s why I made this subject line growth premium on the way down to a discount. It’s like the market’s starting to discount the amount of growth that you’re now seeing on the Mag 7 side. But a lot of people then go like, “Hey, Dave, if you’re seeing some multiple compression or some weakness in the Mag 7, that’s going to bring down the market.” And what we’ve seen this year, that just does not ring true. So this chart on the right-hand side shows you what the Mag 7 names could decline at and what its effects would have on the S&P 500 from a performance standpoint. But it throws in a third characteristic in there. Can the residual 493 stocks help insulate the damage or the negative returns we see on the Mag 7 side where it does not affect the overall S&P 500 index?

And that’s kind of what we’re seeing so far this year. The average stock’s up about 7%, NASDAQ’s down about two, yet the market’s flat. And so I think just putting some numerical numbers and math to this entire equation, if you look underneath the hood and bifurcate the market or make it binary of Mag 7 versus everything else, what has to happen to actually get some meaningful pullback in the S&P 500? And honestly, it’s probably going to be pretty difficult because those 493 companies, they look pretty good right now from a growth perspective, but more importantly from a margin perspective.

John Luke

Yeah, I think my one comment would be, and maybe question to you, Dave, is that at what point does the Mag 7 come in and maybe trim back a little bit on the CapEx spend like watching yesterday with Block’s earnings report, stock’s up 20% because they’re cutting their workforce. In the same degree, I would imagine that if Microsoft came out and trimmed back their cap expectations by 10 or 20%, I bet the market would reward them almost immediately and reprice rather quickly.

David

Well, that’s what the market’s telling you, but we all know the overbuild of labor within the tech space back during COVID. The layoff in tech, honestly, it doesn’t worry me. What would worry me is if we start to see it on the main street level, that’s when the labor problems become out there, because there’s still a lot of tech companies out there that are just over-levered to number of employees. And altruistic as I want to be, there’s probably some fat that needs to get trimmed.

John Luke

Yeah. What software employees make up 1% or less than 1% of all employment?

David

Yeah.

John Luke

So a lot of big deals coming out of I think-

David

We’re about to talk about that too actually.

John Luke

… a pretty small factor. Yeah.

Derek

So I don’t want to gloss this one over because I know you’re going to get into software, but there’s obviously been a lot of financing in software, which really, or at least across tech, which is kind of new, or at least that’s the story out there. So JL, maybe you can cover this chart that you popped in here.

John Luke

Yeah. Well, I mean, private equity and companies loved software models because it was a lot of recurring revenue and high profitability, and so they could easily lever it up, borrow a lot of money and buy these companies and have a pretty steady cashflow and make a great return. Well, obviously if AI creates some problems for software models, than I think it’ll be very company-specific in a wide spectrum of how AI actually impacts a lot of these companies. I’m sure Dave will have more comments on that. But as some of the feasibility has come into play, spreads have widened a bit. And so this chart looks at high yield spreads, and you can see that they’re making a tiny hockey stick up from the lows of about 250 basis points over treasuries up to about 2.82%, so 282 basis points over treasuries. In the scheme of things, spreads are still very tight.

This chart only goes back to 20… I guess, early part of 2021, and spreads besides in 22, we saw them blow out a good bit, but we’ve been in a very tight range for a long time. And so while this might be a little bit alarming or at least something to put your antenna up to watch, if the spreads continue to blow out, they can go a lot further, but you could also be back here next week and see them right back at the lows, which is we’ve seen numerous growth head fakes throughout this market the last several years, and none of them have been right. And so I would just lean into, we need to see more data. I think, like Dave said, shoot first, ask questions later, has been the mantra, but I’m not sure that that’s justified at this point.

Derek

Yeah. So we’ll roll into a little bit of that because obviously there’s a bit of a divergence here between the performance of software in particular and what’s going on at the actual company. So I’m sure you have some thoughts here.

David

Yeah, they took our jobs. That is a quote from South Park about Amazon coming in and taking everyone’s jobs, but I think that is very synonymous to what we could see now from AI, or at least the mentality of that. AI came in and took your jobs. Well, if you look at a lot of the market and performance, because we always talk about the market is the final arbiter of everything that goes on, it is always correct. I mean, everyone on this call has heard it agnosia that John, Luke, myself, Brad, and the rest of the team talk about last year’s performance was very much driven by low quality stocks. Well, this year… Well, also going back to last year, as I said, it was led by low quality stocks, but for the past few years, the markets are rewarded the AI winners. The baton this year has been passed a different mentality and a different approach, and it’s like, hey, let’s find out or trade down on names that we believe that could be disintermediated by artificial intelligence and these new Agenetic softwares.

So while last year the market was led by low quality, it’s almost like this year is the market is giving some moat checks out there that a lot of companies that have been perceived to have some of the best fortress competitive moats out there, they’re the ones that have actually been getting hurt. And that’s actually kind of a ding on high quality because one of the best qualitative factors of high quality is competitive moats and pricing inelasticity. So it might be a moat check in the market, but it’s a gut check to a lot of high quality managers right out there in the market, like Aqua and a few others. And it all comes down to this chart rate here is that a lot of high quality managers would love to own SaaS companies, subscription as a service type of companies. They had moats, they had pricing elasticity, but this year the market is definitely making a lot of those PMs shake in their boots because software has been absolutely crushed.

And what this chart is basically showing you is that the growth expectations for software companies have continued to increase over the past few quarters, yet performance has been absolutely abysmal. Said differently is that all of this pricing pressure that we’ve seen on the software stocks, it’s come from valuation compression. If you look at the last 12 months, I think the average software company’s down just over 40%, yet it’s recurring revenue, I’ll say it again, recurring revenue over that same timeframe is up 16%. So the market is trying to tell us that there’s going to be a lot of disintermediation in this space, or at least in this market with this moat check, and it’s our job to try to figure out, are these companies being either genuinely punished right now from this narrative, or do we need to be pragmatic about our thinking on how this market’s going to evolve from a labor standpoint moving forward into the future?

Obviously that brings in, John, I could give it to you in a second, but that brings in this whole existential philosophical question of capitalism and how the market historically has been able to mold itself to new times as new technology has been brought to the market, whether it was the steam engine back in yonder years, whether it was airplanes, whether it was the technological party, whether it was the industrial revolution, or even more recently all the way up to the internet mantra and the internet mania that went on in the late ’90s and early 2000s, the market has always molded itself from a capitalistic standpoint to create new jobs, replacing all the ones that could be lost from this newfound technology. But this is a big existential question out there in this market is AI going to take over everything? Will the government step in?

Are white collar people going to lose their jobs because of this new found revolutionary technology? There’s just a lot of unknown out there. And I think that’s maybe why people feel like there’s chaos on this market, why they think that there’s turmoil in this market. And I think that we just have to be very pragmatic, but more importantly, rational when the market acts like this and just get back to the basics, and that’s earnings growth and that’s profit margin expansion.

John Luke

Yeah. Well, I mean, we know that the economy isn’t a zero-sum game and whether-

David

And AI will be high.

John Luke

Yeah, exactly. And so whether the software companies have some economic losses, it probably leads to economic gains in other parts of the market. And that’s why we have a diversified allocation, and also while we have hedges on our portfolios. So whether it’s this chart and kind of a shock you’ve seen to software specifically or the chart heaven forbid from before on high yield spreads ends up spilling over to the other parts of the market. Well, it’s nice to know that you have true hedges in your portfolio. And to reference back to the chart about treasury returns, I don’t think betting on treasury yields to drop from 4% to 2% is very likely to happen. And in a market downturn, actually having forms of protection in the portfolio that can benefit is going to be fruitful for investors.

So yeah, it’s going to be interesting to see how software stuff plays out. Again, it’s a small sector. It’s a pretty small part of the S&P 500. I think it’s what, five or 6%, and that’s kind of in a number of names, but that’s like-

David

Microsoft.

John Luke

Yeah. So the right tail of the names are smaller. When it comes to the labor market, it’s not much. And I’m guessing that a lot of these AI software-based companies have spent a ton of money on hiring some of the best software engineers in the business that probably use AI in their process to make them more efficient and make them better and improve their productivity and profitability. And so I think the market’s kind of maybe it’s focused too much on the short term than on the long term.

David

JL, we missed one of the biggest points. We’re obviously showing how software’s been crushed from a performance standpoint because people think they’re going to lose all the jobs in software. If you look at software job openings on Indeed.com, job openings are growing so fast. They’re increasing so fast, so much faster than the job openings of the overall market right now. So that flies right in the face of the narrative that this market has grabbed hold of crushing software. That it almost tells you from a job openings perspective that maybe those jobs aren’t going anywhere.

Derek

I like your term moat check. That’s a good one.

John Luke

It is.

Derek

So all right, well, we’re in the eye of a storm, obviously, if you’re a software investor, there’s a lot of motion, a lot of movement going on, but calendar’s going to be marked on Monday. We’ll get closer to Q1 earnings and outlooks for the year. I know you like to see the progression and how consensus earnings estimates are holding up, so let you wrap with where this is going.

David

Earnings, growth, we had NVIDIA come out. Unbelievable earnings. Stocks traded 24, 25 times. You have the stock are down 4%, but I think it just shows you that, hey, earnings growth is still absolutely unbelievable right now. And now that we’re through earnings season, I think I was even more enamored and impressed by them. I mean, revenue growth, D Earn and JL are eight or 9% during the quarter. And that’s off of last quarter, 7%, the quarter before that, six. That’s revenue growth. Here, we’re showing earnings per share growth. So right now for 2026, we’re expected to grow earnings by 14.3%. For 2027, you’re expected to grow them at 15.7%. Get back to the basics. Earnings growth is all that matters. And the trajectory of earnings growth is all that matters to this market. Do not forget while there might be lots of headlines, negative headlines out there from the media, whether it’s geopolitics, whether it’s Iran, whether it’s Cuba, whether it’s anything from a headline perspective that makes us climb this wall of worry, remember at the end of the day, get back to the basics, focus on earnings growth, because you know what?

This earnings growth, this S&P 500 number, the S&P 500 is built by US companies that tend to be very resilient. There’s just 500 of them out there that come together and everything is very strong from a growth perspective right now. But to John Luke’s point, obviously when everything feels all nice and resi, you still want to be protected. Luckily we have some of the most efficient guardrails out there for portfolio in case there is some type of air pocket. And then in case there is some type of quick fitful pullback or even a long pronounced pullback in the future, obviously we can’t prognosticate what returns are going to be in the future. All you can do is prepare. So while we’re prepared to remain optimistic, we’re also prepared in case the market becomes less optimistic and sees some negative price return, which would be normal and healthy in my opinion.

Derek

Awesome. Well, I guess we got a Fed meeting and moving towards earnings season, so plenty to do in March and plenty of jockeying after this wild start of the year. So appreciate you all coming on.

John Luke

And thanks, D Hern.

David

Thanks very much.

Derek

Enjoy your weekends. See you next week.

John Luke

Have a good weekend. All right, see you.

Derek

See y’all.