Aptus 3 Pointers, November 2025

Full Transcript

 

Derek

Well, happy day after Thanksgiving for us. I know Dave’s coming off a nice evening. Thank you all… with the Bengals win. Thank you all for making this time.

Dave

I forgot what it was like to win, D. Hern. It feels good.

Derek

That’s good. Nice way to start your weekend.

Dave

Yeah.

Derek

A lot has shifted around this month, so it’ll be good to go through some of your key points but, as usual, we have Dave Wagner, head of equities. John Luke Tyner, head of fixed income. Just going to go through some of the stuff from November, some of the charts. These guys put out dozens every week, and picked out a couple of their favorites from the month to talk through what has happened. I’ll do a quick disclosure and let them get to it. 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 S&P flat this month. Pretty much just nothing, huh?

Dave

Who would’ve thought? Who would’ve thought that the S&P 500 was flat during this month? Because anywhere you looked on TV or the phone conversations that we had with people, it felt like the world was ending. The market, as measured by the S&P 500 during the month, had a pullback of 5.07% intraday. And as we all know from all of our quarterly slide decks, is that the market tends to see three 5% pullbacks on a 12-month basis. And we had basically our first since the tariff tantrum back from February, March, and April.

But it didn’t really feel like, to your point, D. Hern, it didn’t feel like this market would’ve been flat on this month. But how I’ve been framing it, there’s two reasons. And I think there’s two scapegoat reason that I think people are calling for this pullback. The first was that the AI trade was getting a little bit long in the tooth so there was a little bit more irrational exuberance in the space, and people were worried about some type of bubble occurring in the AI area, mostly because of that pesty guy who got famous during the mortgage-backed security crisis. Michael Burry was calling for the heads of some of the major AI players out there.

The second reason that I also consider to be kind of a scapegoat reason for the market pullback is something that is right more in JL’s territory, was that we may not get an additional rate cut in December. That that might’ve been pushed out to January. I actually don’t think that’s what really caused this market pullback, but that’s the narrative that sounded great. I think this was more just a positioning unwind and trade because as myself, Brad, John Luke, and the rest of the team here, we’re looking underneath the S… pardon me. We’re looking underneath the hood of the S&P 500 on a daily basis. And it just looked like there was just a positioning flush going on in the more higher risk areas of the market, specifically lower quality stocks.

And then you couple that alongside of, the month saw some overall low liquidity being injected into the market as well. And I think that’s what really has caused the pullback. But that doesn’t sell clicks, that doesn’t sell fun TV, so I guess we’ll just have to stick with the AI narrative and also the rate cuts getting kicked out an additional month as why we got some type of volatility during the month.

Derek

Today JL was going to talk a little bit about bonds. I might need my mic on to get through that. Today I’ll go through bonds, and your point about the FOMC. There was a few flips during the month, which I’m sure you’ll cover later. It seemed like there was a whole lot of Fed talkers this month. As earnings season fizzled out, we focused a lot on that. But I know one of the things that you had put in here was just talking about what the environment actually is for rates. Obviously the Fed’s been, or at least the discussion around the Fed has been a heavy debate between employment and inflation. And so you can cover some of this and where things actually sit.

John Luke

Yeah, there’s quite a bit of back and forth. You’ve got Chairman Powell’s term ending next year, and you’ve got what looks like, as Mr. Hassett, as the front-runner for the new Fed chair. And so that’s led to just some back and forth. But what you’re seeing play out is more, maybe not confrontation, but a lot of disagreement in terms of setting policy and where folks land on the spectrum.

If you think about Chairman Powell’s last couple of years, or several years that he’s been the chairman, he’s really been focused on getting alignment within the Committee. And you’re starting to see some of that break out. And a lot of it I think has to do with this chart, where there’s of course a huge fear of another wave of inflation by some of the more hawkish members of the Fed. And then there is a look at reality, which I think this chart focuses on well.

When you look at the borrowing cost and the real interest rates for a lot of sectors of the economy that are very important to keep things lubricated and functioning, rates are high and restrictive. And we’ve heard a lot about the K-shaped economy in terms of the upper end consumer and the lower end. And it’s kind of worked the same way from an interest rate perspective. And probably, really, there’s a strong correlation between the two.

But the brown line looks at borrowing costs for small firms. The red line is of course mortgage rates, which is front and center and has been the last couple of years. And then the Fed rate and then the 10-year rate. And as rates have come down 150 basis points since the peak from the Fed funds perspective, it’s brought the whole yield curve slightly lower. But there’s been a significant lag in policy rates for other parts of the economy.

Mortgages are still expensive, especially with most of us anchored to the 2% to 3% rates that we saw that… we probably never will see those again. But I think if mortgage rates can get back into the five-ish handle, that it can help unfreeze some of the stickiness that we’re seeing in the real estate market, both residential and commercial. And I think, as an aside, you’re seeing a little bit of sellers’ fatigue from the perspectives of houses on the market, where people are pulling their listing because they don’t want to lower the prices any more than maybe they already have.

And so as those rates come down, I think that can be a key catalyst for 2026 where, if we can re-spur back the residential mortgage market and environment, that it can be another driver to the economy next year that maybe some aren’t focused on. And then the biggest one is just small caps. And we’ve talked a lot about that this year. Small caps rallied when rates were cut this summer. But you can still see that your borrowing costs are basically double where they have been the last eight or 10 years.

And so that’s definitely a more expensive hit on the economy for a lot of the smaller firms that are impacted, as well as just private businesses. So I think you have two sides, to sum it up, of the Committee. Half are seeing the restrictiveness of real rates and see it as a problem and that rates need to be cut, and then you have the other half that’s not looking at this data and just focused on what could happen with inflation sparking its head back up. And they’re being, I think, too conservative or too preemptive or too presumptive of that playing out next year.

So you’re not necessarily seeing inflation kick back up, and I think that’s probably a win for the doves. And if you look at where Fed policy is pricing now, like Derek alluded to, I think it got down to less than a 30% chance for a rate cut in December, which is, the meeting’s on December 10th. But now this morning it’s pricing a 84% chance of a 25 basis point cut. So quite the shift there in sentiment. And it maybe isn’t the key driver to markets, but it’s certainly driving some of the market action that we’ve seen, and it’s probably helped with the recovery that we’ve seen off the lows from last Friday morning.

Dave

Luke, are you cutting if you’re a voting member? What are you doing here?

John Luke

Well, the key thing that’s tough is that if you look at when the data is actually coming in, we get PPI on the 11th, which is the day after the Fed meeting. You get the jobs number on the 16th, which is the Monday after, because of all the shutdown and the delays. And then you don’t get CPI until the 18th. So I think it’s probably more a 50/50 chance than it is 85% or roughly what it’s pricing this morning, but I still think they should probably go ahead and cut. Not the situation that you want to be in, though. You don’t get the data until after you make the decision. And so there’ll be some Monday morning quarterbacks following the week of the 18th. Common-

Dave

It’s wild to see all these different Fed voting chairs actually put their opinion out there because it feels like Jerome Powell’s in a little bit of a lame duck situation now. So opinions are definitely heightened right now. And John Luke, you probably saw the story. I’m keeping tally right now. It’s like seven to five for a rate cut in December. But what if like Lisa Cook flips? Because she’s been historically a dove, and she just maybe wants to spite Donald Trump given some of the actions that he took against her that could make it six-six pretty easily, and that means no cut.

John Luke

Yeah. And that’s assuming Powell sides with the doves, too, so it’s going to be-

Dave

Which we’re assuming. Yes.

John Luke

It’s going to be a hairline difference. Hopefully Lisa Cook doesn’t put politics into the decision but, based on the state of the environment, I wouldn’t be surprised. So I think it’s closer to 50/50.

Dave

We haven’t seen a stalemate, John Luke, in voting just because, to your point, Jerome Powell and all the previous Fed chairs out there tried to get everyone on the same board so there’s no dissent but there hasn’t really… the last time they had a tie, maybe when it came to voting on policy change, it was like ’82 and ’83.

John Luke

It’s been a long time. D. Hern, you want to just go ahead and skip to that last one? I guess that kind of hits right on the nose.

Derek

Yeah, right. Yeah.

John Luke

But this at the Fed, the Bank of England, and the ECB, and the number of policy dissents per year. And so you can see that, historically, the Fed was a little bit more influential in their differing opinions, where there was some dissent. But really, since the 2,000 era, it’s been the Bank of England where you’ve seen more dissent, and a lot more alignment across the Fed, which really I think goes into good management from the Fed chair of trying to get alignment from the whole crew. And you want people to have a sense of ability to think for themselves and independently, but ultimately it shows sign of strength whenever that there is agreement and consensus. And the market obviously loves consensus and knowing what is likely to happen. But as we get into this dicey situation, more dissent, I think you could start to see those blue bars continue to tick up moving forward.

Derek

I guess the Bank of England takes their parliamentary approach seriously over on the policy side as well, huh?

Dave

Yeah.

John Luke

Well, they’re in a similar backdrop as us, from running big deficits. They’ve had a lot worse growth than we have, and so you’re getting at a point where they have to finance some of the deficits. And I think that math might play into some of the different… their version of the Fed members’ perspectives on where they should set policy rates. But yeah, it’s been a bit chaotic. Hopefully we don’t get that chaotic over here.

Dave

I wonder, if you’d put a Bank of Japan on there for some dissent, John Luke, I feel like there’d be a lot of dissents right now given the policy that’s going on over there.

John Luke

Yeah, Japan’s certainly one that folks are watching because there is so much impact on their ownership of our Treasury securities and the shift that they’re having with their government to a more conservative backdrop but also one where, you don’t put it in the same senate often, but they’re really stimulating, even with the conservative backdrop.

Dave

Interesting.

John Luke

And so you’ve seen their currency get dinged substantially the last couple of weeks, and their longer term rates rise pretty drastically. It’s been kind of eye-popping. And so their backdrop moving forward also could look a little bit shaky if… they’re very levered and, if rates go up drastically, it’s not the greatest thing for global funding. And you think about carry trade and that the yen has been the borrow currency for a long time. And if rates are much higher, and especially if they’re rising quickly, that could create some liquidity issues, I think.

Dave

Yeah. We all remember what happened on August 23rd, I think, of last year, with the yen carry trade. But just to put some context to what John Luke is talking about, there’s just another great example that the floor for global rates is continuing to rise. Like in Japan’s case, back in 1990 they had a debt-to-GDP ratio of maybe 63%. Well, that’s now ballooned to almost 240%, yet their growth, like GDP, is an abysmal less than 1% meaning, if you compare that to, Germany’s at 1.8%. No, Germany’s at like 1.5%, the UK’s at 1.8%. We’re at 2.5%. But if they’re growing less than 1% with that type of debt load and they’re trying to stimulate the market it is, to John Luke’s point, a recipe, potentially, for disaster.

John Luke

Yeah. They might-

Dave

I don’t know, but it’s not a good situation.

John Luke

Their Liz Truss moment, right?

Dave

Yes.

John Luke

Where you question direction of policy.

Dave

Did that work out for Liz Truss?

John Luke

The cabbage got more votes than she did.

Dave

The cabbage did, yeah. She was what? In office for two weeks?

John Luke

Yeah.

Derek

Well, I know, Dave, you’re going to cover a little bit of what the earnings picture looks like. But obviously the hyperscalers and Mag Seven and all that has a pretty big impact on what the earnings outcomes and the sentiment behind earnings looks like. So you put this in here, a couple of charts here that just talk about what’s going on with the hyperscalers. So talk us through this.

Dave

And I love your title that you put in here, D. Hern. It is, Scalers Are Scaling. And they’re going to continue to scale. I can’t tell you how many calls and emails I’ve fielded over the last three weeks in regards to that pest, Michael Burry, and his comments about AI scalers, the hyperscalers, and the bets that he had on this space. As you all can tell, I’m not a fan of the pontification of this gentleman. Wish him all the best but the hyperscalers, they’re not going to slow down anytime soon.

And we’ve talked about it at ad nauseum, that these hyperscalers are utilizing free cash flow and retained earnings to drive this CapEx spend. And again, to put this in context, this year we’re expecting $400 billion to go to hyperscaler CapEx. Pre-COVID, that was a Washington D.C fiscal bailout package policy size, and now that’s only increasing to $533 billion next year and potentially $600 billion in 2027.

And I would say Wall Street analysts have consistently underestimated how much CapEx is going through this space to start every year. So I would expect these numbers to go higher. But one of the things that’s been somewhat scaring investors out there is that they’ve moved on from utilizing free cash flow and retained earnings to utilizing some debt. And that’s been the point in time where everyone’s going to start calling for a bubble or that the spending has to slow down. I would disagree, and it solely has to do with this table on the right that I put together from data coming out of FactSet. That these companies, like four of the seven Mag Seven companies, they have positive net-cash per share. What does that mean? That means that they have more cash on their balance sheet than they have debt.

So these guys, their balance sheets are so unencumbered from a debt perspective right now. And to be quite frank, a lot of these mega cap companies can likely tap the debt markets for interest rates that are lower than what the government could probably get. Very, very cheap debt financing. And so let’s just put a picture like Apple, Amazon, Google, and Microsoft. I think it was this year. Their EBITDA is about, call it $750 billion in EBITDA. And it’s projected to grow double over the next four or five years. So that would mean EBITDA levels going up to, let’s just say $1.4 trillion. And if you’re looking at it from a net-debt or net-leverage standpoint, they can bring on a decent amount of debt, and they can do it very simply, easily. And it’s not going to inhibit the company from a balance sheet perspective whatsoever.

Again, like Nvidia, Tesla. Tesla shouldn’t really be in this conversation. But like Google, Meta. Net-cash positive on their balance sheet. These guys can continue just to throw money around and throw money at this revolutionary technology, and I don’t see debt being a problem anytime soon for any of these companies. The last thing I would say here is, another question I’ve been fielding is, are we in a bubble? I don’t think so. I’ve got to give Brad a hat tip for this next comment, but he said, “I think we’re in a bubble of people calling for bubbles.”

And if anyone wants to hear my thoughts on bubbles, give me a call or shoot me an email. I can go into a 20 minute diatribe on bubbles. But I think we could see an air pocket into the future. Whether that resonates into the private credit market to exasperate the problems that we’re expecting to see in the private creditors, I’m not sure. But I expect we would see some type of air pocket in the future. Maybe not the near future by any means. But I’m not worried about this being a bubble at all. That this narrative, this theme is going to continue to drive this market because what we’re seeing and expecting from this revolutionary technology from a productivity standpoint, it seems very real and tangible to me.

Derek

Yeah. And one of the things-

John Luke

I…

Derek

Sorry. Go ahead.

John Luke

I just thought it was funny. You started with the comments on Mike Burry. And I saw something, that he’s got a $10 million run-rate Substack going right now, where he closed down his fund but started… probably steered this exactly where he wanted to go. Not actually managing a ton of money but writing about fear and stuff that sells clicks. But $10 million rev rate Substack. Ain’t a bad outcome for a few Tweets.

Dave

For being right one time in his life and being wrong a decent amount. I’ll stop by talking about that subject, though.

Derek

One of the things that kind of ties in a few of these things: you talked about the hyperscalers, which obviously are a huge force behind the year-over-year earnings growth. But also we’ve had this, you talked about small caps before and the funding issues there. I know you’ve posted a few charts regularly about how the 493 is going to catch up. We haven’t fully had that moment yet, but maybe you can talk us through what you’re seeing on breadth of earnings and where this all fits on the mega stocks versus the rest. And when you add it all up, where do we sit?

Dave

Yeah. I’d start off by saying, what another unbelievable earnings season for the S&P 500. What is this? Three or four quarters in a row where you’ve seen EPS growth on a year-over-year basis be double digits? I’ve seen numbers all over the place because they’re so high. Between 13% and 16% year-over-year earnings-per-share growth for the S&P 500. That’s unbelievable. And I can’t really see… and that’s off a revenue growth of almost 7% or 8%. So it’s really hard for me to think that this market, in the near term, could go into some type of recession at this levels of growth because it’d be very difficult for me to see growth go to zero at the mega cap side of things right now. But to your point, D. Hern, let’s categorize earnings growth into three different buckets. First let’s do the Mag Seven. Second will be the residual S&P 493. And then the third basket, we’ll do just small cap stocks.

To the point that John Luke made earlier and your point, D. Hern, about funding costs, the average interest coupon payment that a mega cap or a large cap stock tends to pay on their debt is close to 4%. For small caps it’s close to 8%. So I think a lot of the direction of small cap earnings growth is going to be based off of where rates go in the near term because, as I’ve always said, small caps, about 80% of the debt on their balance sheets tend to be floating. And when you have floating rate debt, it tends to be shorter in duration of maturity. So that’s why they’re so sensitive. But what we’ve seen is the S&P 493 earnings-per-share growth is not expected to catch up to the earnings growth of the S&P 500 until 2027.

People were calling for end of 2025. Some people were calling for 2026. But that can, for the confluence of growth between the 493 and the overall S&P 500, it just keeps getting pushed out to 2027. And that just shows you, one, the strength of the Mag Seven just has not slowed down, and it’s not expected to slow down. A lot due to the amount of dollars going into CapEx spending from your Oracles, your Microsofts, your Metas, your Amazon, and your Google. It’s just not slowing down. But one thing that has surprised me is that small caps’ earnings growth is actually expected to grow at the same level as the S&P 500 in the fourth quarter of this year.

But again, that has a lot to do with the rates. So that can might get kicked out into 2026 at a point. But I think that’s why we’ve seen smaller cap stocks perform relatively well versus, let’s say, the average stock, the S&P 500 average stock. If you’re looking at ETF, that’d be like an RSP or a GSEW. But people have been calling for this to occur for quite some time. But the can keeps getting kicked down the road here.

And to a point, I think the market just continues to substantially underestimate the power of operating leverage when it comes to the large players in this market. I don’t think that they estimate it properly. And that’s why you have quarters like this, where you were expected to see earnings-per-share growth on a year-over-year basis for the S&P 500 increase by 8%. Well, that was the estimate as of October 1st. Well, we all know that earnings-per-share growth came in about 15%, almost double expectations. And you could say that for the Mag Seven also. Their earnings growth came in, and I think closer to about 20% when the market was pricing in 14% or 16% earnings-per-share growth for the Mag Seven. So there’s still so much strength in earnings, and it just makes it very difficult to bet against this market or to make some type of recession call in the near future.

John Luke

Think about the drive and productivity that we’re seeing across those big names. I just saw a chart this morning that S&P 500 revenue growth per-employee is up 40% over the last four years.

Dave

What?

John Luke

So they’re doing more with less folks, and that just drops straight to the bottom line.

Dave

But that’s the exact conversation on your side of the ledger, on the Fed side of the ledger, John Luke, is like that’s the existential question that Fed chairs are trying to figure out right now. Is this a labor problem? Is it a demand problem? Or is it a supply problem right now? And I don’t know what your take on that, John Luke, is there, but I think it has a lot more do to immigration right now than what we’re probably alluding to or thinking.

John Luke

Yep. Yep. And you have a balance of figuring out, as AI and productivity and Perplexity and ChatGPT is incorporated into folks’ workflows, well, what type of other industries, Economics 101, get created out of the revolutionary technology you’re talking about? And so there might be a little bit of a lull in that occurring but I would bet that the capitalist system figures out a place to put those folks and get them jobs.

Dave

Yeah, We’ve always said that, John Luke. The Dot Com Bubble occurred obviously in ’99 and 2000. The market had trouble, during that period of time, trying to price in the benefits and the value add of the internet in the future. That happened four years before Facebook was created, six years before the iPhone was created, 12 years before even Uber was created. So that’s a great point. This new gig economy that we’re trying to work through and figure out, we don’t know how this market is going to evolve because we know that this market is very dynamic. And it is going to evolve with this revolutionary technology. And our labor force is going to look completely different 10, 15, 20 years down the road.

John Luke

Yep.

Derek

Yeah. Seems to be the biggest not obstacle but challenge to any major sell-off continuing, these earnings. You just keep coming through every quarter and seeing the earnings were unbelievable. And it’s revenues, it’s margins, it’s all of it. So yeah, I think that’s-

Dave

8% revenue growth is unbelievable.

Derek

Yeah, yeah. It’s pretty amazing. Well, cool. Thanks for coming on, guys. Hopefully you get a nice, at least a few extra hours today. I guess the market opens or closes a little bit earlier than normal. And maybe a little chance to catch up this weekend. So appreciate you coming on as always.

Dave

God bless.

John Luke

Thanks, everyone.

Derek

Thanks, guys.