Given the popularity of our weekly Market in Pictures, we started the habit of picking out a few and going into more detail with our PMs. In this edition, John Luke and Dave spend a few minutes on each of the following:
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- July Rally
- Healthy Consumer
- Earnings Season
- Fed’s Internal Strife
- Tariff Reality
- A Story of Tails
Hope you enjoy, and please send a note to info@apt.us if there’s a particular chart/topic you’d like to see covered next month. Time to swing it around!
3 Minute Read: Executive Summary
Full Transcript
Derek
Hey guys, 31st of July. Getting this out just before the end of the month. Been another fun month. And the crew is in the heart of digesting a lot of things. So we’ve got Dave Head of Equities, John Luke, Head of Fixed Income, digesting earnings, Fed moves, all that stuff, or Fed non-moves, all that stuff. So thanks for coming on.
I’ll do the disclosure and let these guys talk.
The opinions expressed during this call are those are 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.
So, lots to go through. Another good month. So, tell us what’s going on.
David
Thanks D. Hern.
As many listeners know, John Luke and myself, we spitballed this. We just tossed a few charts together before this. And just so you can our natural fodder in conversation that John Luke and I have on a given day. We don’t know exactly where the conversation is going to go, but we have some charts to try to direct us where we probably should be going.
But looking at performance in July, July has been, from a seasonality perspective, a pretty good month. But it’s also pretty good notator, dictator of how the residual part of that calendar year is going to perform. When July tends to be strong, the remaining five months also tend to be quite strong. If July tends to be weak, well, the remaining part of the year also tends to be weak. So obviously, this is not a green light signal for us in the market. But at least it’s a positive arrow on our quiver to remain a rational optimist, as we head into the end of the year. Because we do know that seasonality does tend to slow in October. That’s normal, it’s natural, and then gets picked up in November and then in December with the Santa Claus rally.
But all in all, this was a very good month for domestic stocks, small caps, and large caps, for about a like-minded amount. Outperforming international. And really since the market bottom on April 8th of this year, S&P 500 is now outperforming the international markets. In fact, as of yesterday, July 30th, S&P 500 is now outperforming international markets on a one-year basis.
We are seeing some strength in emerging markets right now. And I think a lot of that has to do just with a lower valuation than EFA. And they actually had some opportunity for some more margin expansion relative to EFA, with an overall same growth rate. And I think the markets are really starting to recognize that right now.
Bonds had a tough month. But all in all, I think, as we always talk about every single month, you just have to follow the market, follow the tape, what the tape is telling you right now. And the market’s pricing-in some pretty good opportunities moving forward in the future that John Luke and I will probably speak about on this call, whether it’s better than expected tariffs, better than expected earnings, the passage of the One Big Beautiful Bill, just another case study showing the amount of liquidity that fiscal policy can pump into this market potentially before monetary policy really starts to swing its bat with the rate policy cuts later in this year, as we had a Fed meeting just this week that we’ll talk about.
But all in all, we’re starting to see some sentiment increase amongst investor base, our investor base, even though it’s maybe not to the level of what we saw back in February. But again, pretty optimistic market right now. And I think that’s something healthy in accordance, whether it’s with earnings, with corporate America, or just the overall consumer, itself.
John Luke
Yeah, I think a lot of that is been repeated the last couple months, where it’s just been this wall of worry higher after the lows in April. And just things ain’t as bad as people feared. And ultimately, that’s a good thing for markets. And we’ll take that climb of the wall of worry.
But the few things that we always lean onto is, what’s the consumer expression right now? Dave will get into earnings in the labor market. And what we’re seeing is continued improvements, obviously, with markets higher, net worths go higher for the consumer, at least the consumer that owns assets.
But what you’re seeing in this chart here is just debt service payments as a percentage disposable income. And what you continue to see is improvements on the consumer side from the balance sheet perspective. The debts are reasonable.
And then, Dave, if you pull for that next one, I think this, maybe one more, on, yeah. I think that this one shows it pretty well where, you’re finally at a pace of seeing consecutive months of real positive wage growth. And so, that’s obviously helping consumers tolerate the one-up price increase that we’ve seen since COVID. Where, at the onset, the prices were really digging into people’s finances. But what you’re seeing is a turn in that as incomes continue to drive higher and inflation drives closer and closer to targets.
The backdrop for the consumer, I think, if you have a checkbox of things that you’re watching for, just continues to be a bellwether to the economy. We know how much that they’re spending, are spending as US consumers impacts the economy at large. And so, we continue to see this humming along.
And then, on the labor data front, although we will get another NFP report tomorrow morning, what you continue to see is a reasonable range of continuing claim.
Sorry. What you continue to see is the range of, I accepted a phone call that was coming in somehow. What you continue to see is the range of continuing claims on the labor market are, basically, right in line with averages. They’re nowhere near concern. You’ve got a nice balance of supply and demand with labor. And so, that’s just what the Fed said yesterday in their meeting, labor market is still pretty resilient and growing.
David
Yeah. John Luke, was that me calling you to derail you from the commentary? John Luke wouldn’t be surprised by that.
John Luke
But that would’ve been on par.
David
You’re hitting on so many different great points that the Fed’s trying to reconcile in their head right now. Obviously, that’s the big thing going on in this market right now, is everything Fed. Are they going to cut? Are they not going to cut? When are they going to cut?
Then you also have the opportunity of the job going on between current Fed Chair, Jerome Powell and current President Donald Trump. And so there’s a lot of noise here.
So I think, outside of earnings, of course, because I’m the guy that’s earnings all day, everyday. And we’ll talk about that here a momentarily. But the Fed is basically in the passenger seat is the second most important linchpin to this market right now. And John Luke, I actually think some of the GDP data, because you mentioned great points on the labor market, very strong.
You absolutely love to see this here, that real average hourly earnings is growing faster and at this pace, especially above inflation. Beautiful, unbelievably beautiful.
But I think what the Fed’s trying to reconcile, and with the two dissents, first time we’ve had two dissents since 1993. I think those people are focusing on this chart right here, John Luke, is that, “Hey, you know what? GDP is pretty noisy right now.” Obviously, a lot of inventory changes, net exports changing in first quarter and the second quarter. But if you look at consumption, it is slowing a little bit and I think that’s what’s catching Waller’s attention. Am I correct?
John Luke
Yeah, it’s spot on. The GDP numbers, I think, you more or less have to average them out. And so averaging Q1 and Q2, you’ve got about a 1.2% real growth rate. It’s not great, but far from recessionary, which I think is the positive note.
But the consumption piece is certainly slowing down to some degree. Although, the comps off of COVID just make everything difficult, because things skyrocketed as people got stemmy. People were spending. All those things that supported this boom in both services and good consumption by the consumer were drawn higher.
And, yeah, you certainly got two interesting pieces of the conversation, with Waller and Bowman, where they were going against the grain of Chairman Powell. I think that, as there’s some internal strife that’s going on within the Fed, that, I guess, taking a step back, the last time that there were two dissents in ’93, the dissents were actually on the other side. The folks that were dissenting were claiming policy with two accommodatives. And what you saw was, after that dissent, shortly after the Fed started hiking rates and actually doubled the Fed Funds Rate.
So maybe the dissents are a little bit of a red herring, at least something that we should pay attention to, as they’re certainly seeing a reason to bring rates back closer to neutral. And we put out a post this morning, or we’re working on it, based on a recap of yesterday. And I dissected that, what is neutral? Chairman Powell said that he thinks that policy is certainly a little bit restrictive at current juncture. But ultimately, I think that the dissents probably lead to cuts, at some point.
And you see pivots in policy pretty regularly at the Jackson Hole Symposium that’s coming up in a month. And so that could be a good time for Powell to lay down the law for next generation of the cutting cycle that we’re going to see. And so, I’m expecting that to play out where he tees up for the back half of the year.
David
I did like Brad’s comment to us, John Luke. Brad goes like, “Jerome Powell has done a pretty good job.” Brad and I believe that, that Jerome Powell’s done a pretty good job.
John Luke
I think he has, too.
David
But he’s going to be memorized, or memorialized as standing next to Donald Trump at the new Federal Reserve in a hard hat for some reason. I just think that’s going to be the photo plastered everywhere.
But continue on your comments John Luke. Yeah, growth is slowing, it’s already hitting above its weight class right now, but it is coming down. And I think, at least a anecdotally on my side, on the equity side of things, we’re seeing that with a lot of different companies reports, with a lot of their jargon on their earnings call. They’re saying, “Okay, you know what, April, May, those were some tough periods of time, especially from a consumption factor perspective.”
We’ve seen a lot of the consumption start to pick back up now in June and July. And that really coincides with this chart here, is that consumption contribution to GDP. Obviously, there’s a lot of inner workings opinions of everything going on there. He’s trying to reconcile inventories and exports.
But it did pull back a little bit. And even in one of the compounders names CHEMED, they saw this on both sides of the business, VITAS, and especially on the Roto-Rooter side. The Roto-Rooter side, they saw a lot of weakness on the retail side, but not on the corporate side of the business.
So it does feel like some of the hangover from Paris post-obliteration date did have some very short-term effects on consumption habits by consumers. But that’s not a reason to be worrisome or worried moving forward because the market’s going to look through that. And my mind, it’s already looked through that. The market’s a forward-looking mechanism. And it recognized that there’s going to be some inadequacies in the data.
John Luke
Yep.
David
All right, John Luke, question for you.
John Luke
All right?
David
We all know that the media is going to blow it out of proportion, that there’s going to be a shadow Fed Chair when Donald, President Donald Trump decides the next Fed Chair, which tends to happen right about this time. Correct, John Luke? Powell’s term’s up in May of 2026. They tend to announce the new Fed Chair in August and September, correct?
John Luke
A little later, typically, like Q4…
David
Okay.
John Luke
… November, December. And I think that the move will probably be geared towards doing it sooner. Maybe we’ll know by September, a couple months ahead.
There’s certainly a few people in the running. I’m hopeful that Scott Bessent stays in his seat, to some extent, because I think he’s done a great job. And we’ll hit on that next with the tariffs and him leading some of those discussions.
But really, what you’ve seen is, you’ve got pressure from President Trump on Powell. He claims that that’s not the cause of him keeping rates where they are. I think that might be a little tongue in cheek, especially given some of the slowdown in the data, probably warranting where they could have gotten away with the cut yesterday and been fine.
This chart here is the summary of economic projections from the Fed from June. Doesn’t get updated every meeting. But you can still see that a number of folks at the Fed are still slated that, “Hey, tariffs are going to have an impact on prices.”
And so there’s some strife going on between those that believe that tariffs are going to continue to put prices up more than just a one-time adjustment, but a consistent adjustment higher. And then there’s a few that are seeing, “Yeah, maybe prices move up, but also the demand works lower.” So it’s much less of an impact on things than what’s feared.
And I think I tend to lean in that camp. And I think you do too, Dave, where the tariff piece is going to be less. And, I guess, flip to that next one on tariffs.
David
Will you feed me my question, John Luke? I was going to see if you thought Bessent could be the next Fed Chair? And I think we both agree that he should stay with the Treasury. He’s been doing a great job there.
John Luke
Yeah.
David
And let’s do tariffs. Because, let me set you up here, John Luke. Because everyone knows my thoughts on economists, can’t stand them. They came out and said that when tariffs were originally prognosticated during the election cycle and around February to April, that consumers would be eating about 70% of the tariffs.
And there’s really three different parties that are going to be feeling the hurt of tariffs, all right? The first one is going to be the exporters, all right? They can feel it. And they’re probably going to feel it first. And then corporations here in the United States. And then the consumers.
And there tends to be a flow down of who feels it first, second, and third, which in my mind, makes a lot of sense because the exporters are going to feel it first, because the first to touch the goods. But that’s going to be pretty minute. Then the corporations are going to do that as they deal with inventories and whatnot. And then over time, six, seven, eight months down the road, that’s when the consumers start to feel it.
And right now, to me, personally, it feels like corporate America is the one digesting a lot of these tariff costs right now, that they have not been passed on to the consumers. Because a lot of this PMI data and this other data of net imports, and prices according to net imports, we haven’t seen that move substantially. So it feels like it’s a lot of corporate America eating these charges right now.
And that is what I wanted to really focus on with earnings as much as I possibly could. Is the overall operating margin of the S&P 500, does this bring down net operating margin? And if it does, that would cause some strife in this market.
But on the other side of the spectrum, you’re seeing companies like Meta, Google, Microsoft had amazing reports, amazing reports, bolster up that margin, and at least maybe net out some of those inflationary problems right now, where it’s not some type of issue.
But tariffs, yeah, John Luke, I’ll let you take it from here. And I got some more commentary on here on tariffs.
John Luke
Yeah, well, there’s certainly been a lot to digest on the tariff fronts with deals achieved and maybe not written in stone. But you see more leverage from the US on the tariff front against other companies than what I think most people gave credit for.
And so, Vietnam was one of the first deals that we saw. Thirty-percent of their economy revolves around exports to the US. So they’re certainly going to be quick to sign a deal because they can’t risk blowing up their economy, than not have one.
And you’ve seen similar things from the EU side, with what had many have said, it’s a one-sided deal favoring the US, with the EU trade deal, bringing tariffs down to 15% on their goods. But actually, a 0% tariff on our goods that go to them.
And so, I think that there’s more leverage. And I think that there’s more, maybe, level-headed negotiating power that in charge than maybe what you see on the financial media or the pundits that you hear on TV.
And so, the good part of the whole tariff mix is the people that, the countries that are making the deals are seeing better rates than what was initially feared, by a pretty long shot. And so, what I think that that does is a balance of revenues for the US from tariffs. Which equates to a win for the Trump Administration and a big piece of what he campaigned on. And a win for the consumer, where the tariff rates are much less than what they could have been. And so, just maybe less marginal impact on pricing.
David
And everyone, John Luke, is talking about, in regard to tariff uncertainty. But I think we’re starting to get some certainty out there in the market. And that’s why I’m confused, say, on our quarterly call, the market is not focusing on tariffs anymore. It’s focusing on the health of the consumer and in the labor market, all in one. And then also, the resiliency of corporate America, in regards to earnings.
Because this chart just does a great job with it. Because if you go back to Obliteration Day or Liberation Day on April 2nd, the lowest tariff rate was the UK. The highest tariff rate x China was Vietnam.
And obviously on this chart your seeing that India is higher than Vietnam. But Vietnam has some trans-shipment costs that probably increased their tariff rate just slightly.
But basically, UK was the lowest on Obliteration Day and Vietnam was the highest. And you created some type of book ends. And it’s literally the first two deals that were really put out there in the marketplace just a few, mere weeks ago. So you knew where the low end was going to be post-Liberation day and the high end with the Vietnam. And I think a lot of that has been synonymous with what’s actually come out in the news over the last three or four weeks. So I think that there is some certainty in this market where we’re going to shape everything out.
John Luke
And one last comment on that. There’s a pretty important court ruling today. And the start of some court rulings that could be interesting with, essentially, how the tariffs were put into place via the legal action and the route that Trump went. And there’s plenty of folks fighting the legality of it. And so, there’s a non-zero chance, or above a non-zero chance that some of this tariff revenue has to be rebated back. And it doesn’t go to China, doesn’t go to Vietnam. It’s basically a check that gets written to the company that paid them. And so, you do have this potential backdrop later in the year where these companies could get some prize earnings popped at the end of the year.
David
I actually think that’s one of the more underappreciated things going on in this market. I think we should, let me hit on it again on my side.
John Luke
Yep.
David
Just because the judicial side, when they’re going through that, it’s the IEETA specifically. These companies might have to get rebated on these tariffs. But that doesn’t mean that tariffs are going to go away, because there’s other legitimate avenues in the future that can be reinstated through tariffs through the Trump Regime, whether it’s section 232, 301, 338, or like the 1930s Tariff Act, which creates a temporary benefit here.
But to John Luke’s point, imagine that by the fourth quarter that there’s like a $100 billion of cumulative tariffs refunded to these companies. And then you have monetary policy that would be easing and probably some focus on deregulation. I really think that we could go from talking about flagging a US consumer that was weakening to a US consumer that’s overheating this economy very, very quickly.
And what would that do to rates, John Luke?
John Luke
It might put some pressure on the Fed. You got a comment yesterday from Powell that the market didn’t love. That was basically one thing that they’re not hiking rates looking at the increase in goods prices due to tariffs. And that was the response, is that you could take that as a positive. Markets saw that pretty negative, given that kaboshed the short term hope for cuts. I don’t know if he really meant that to the extent the market took it. And seeing the reaction today, probably didn’t. But it is notable.
David
Goods are 30% of our economy now. That’s what he was focusing on there. Service is still 70% here, so this is wild, in my mind.
I’ll be earning, quick on earnings.
John Luke
Awesome.
David
I could simply end my commentary on earnings with, awesome so far. Whether it was banks that started two weeks ago, whether it’s been some of the Magnificent Seven, like Google had one of the best earning reports I’ve seen them from them in a very, very long period of time. And then just last night, they got put in the rearview windshield with Meta. That was amazing.
Microsoft had one of the best earnings I’ve ever seen from top to bottom. And it’s still very much centered around this AI narratives.
And those that have read our stuff, it’s very difficult for me to say something along these lines, being a small cap portfolio manager, but top to bet against large caps right now. That’s exactly what our overall allocations do here at Aptus. Let’s overweight beta as much as we possibly can, but keep risk in check with some type of guardrails.
So I love seeing very strong earnings seasons, even if it is highly-concentrated in the Mag Seven and a lot of their CapEx spending. But even on the hyperscaler side, like Azure grew 39%. We’ll see AWS tonight. Like Google GCS, which has been the tertiary seat out of the other players, that still grew 29%. And we’ve all heard you say that one man’s CapEx with another man’s revenue. We’re just continuing to see that.
And it feels like that part is the economy because they have that new-found characteristic of operating leverage, which expands margins, is insulating some of the, now, in my opinion, somewhat immaterial impacts of tariffs that are having on corporate America, or just the consumer itself. So, a lot of people were very pessimistic heading into this earnings season. The bar was very much lowered from an earnings growth perspective on a year-over-year basis, to almost 4.8% down from nine, 10, 11% at the beginning of this year. So though a low bar, it seems like, knock on wood, the market handily beating it, as of right now.
Hopefully, I don’t have to eat crow with that comment. But I would say that just because we’re having a good earnings season doesn’t mean that my head isn’t in a pretzel, and Brad’s head isn’t in the pretzel, given some of the dispersion in returns on a daily basis, because we’re seeing a lot of stocks up 20% and a lot of them down 20%. It’s a very difficult earnings season, from a performance standpoint. Luckily, implied [inaudible 00:25:38] were very low where, John Luke, J.D., and the Derivatives Team had the opportunity to be very advantageous with some of our funds. And it just shows the notion of how important it’s to be active in the derivatives-based space and not be handcuffed to calendars. And this earnings season is just another great example of that.
John Luke
Final slide. I’ll kick this one and then you hammer it.
So this is a great chart, just showing the annual performance of the S&P. And really highlighting that the average return of the market between eight and 9% happens very infrequently. And that just so happens to be where we sit right now. The market’s up about 9% on the year. And really, this is just pointing out that it would be quite rare if the market finished in that eight or 9% range. I think it’s happened four times since 1950. And fed another way, the market’s been nearly 30% of the years above a 20% return.
So noting some of the comments that Dave started with about seasonality of markets, about how strong performance in July typically equates to a strong finish to the end of the year, I think there’s a lot of reasons to be bullish on markets with this backdrop.
And maybe a little fuel on the fire if that tariff legal action test flowed through.
David
I could say yes. Great job, John Luke.
Derek
Obviously, I haven’t had to chime in at all, you guys could go on this for probably another hour.
But I think, just as an observer here, one of the things that I’m picking up from the discussion is, it’s crazy for anyone to think that they have the situation nailed down. You guys brought up a lot of different things that, whether it’s how, the resilience of the consumer, the ability of corporations to get through maybe some price input increases, and just be just fine with earnings. This thing about maybe a legal action that could change, could send money back to corporations. A dissent at the Fed. There’s a lot going on. So for somebody to have 90% or more certainty on anything is crazy. And I think that’s where you guys hammer it all the time. But just having a robust structure in place, that allows you to prepare and not predict, is just far more relevant to anyone’s investments than trying to pick what’s going to happen. Think about where the news has been the past few months. And here we are, all-time highs.
John Luke
Yep. I think Dave’s laid it out perfectly in a number of our calls, just talking about returns for the year. Unless you does anything foolish in April, was getting very reactional and emotional, your returns for the year have been pretty darn good. So keep on I.t
David
This past quarter, this whole year has just been numerous case studies of stuff we’ve been talking about for so long. So I don’t know if we’re lucky, or smart, or a mix in between. I think John Luke’s probably more on the smart side, I’m more on the lucky side, and we just blend in the middle.
But if anyone wants to have a conversation on the quarter, talking about these five-plus case studies that we’ve witnessed over the past six months and how our focus is on being very pragmatic and evolving with our philosophy of the market evolves, give us a call.
Derek
Awesome. Thanks guys. I know it’s been busy and appreciate you spending the time and this is going to be helpful for everybody.
John Luke
Thank you guys.
Derek
See you guys.
David
God bless.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2508-6.