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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- October Performance
- Fiscal Stimulus
- FOMC Outlook
- Long Range for Yields
- K-Shaped Profit Margins
Hope you enjoy, and please send a note to [email protected] 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
Good morning. Happy Halloween. Happy Friday.
Dave
Good morning.
Derek
Everybody’s fired up.
Dave
Happy Halloween.
Derek
On this last day of October.
Dave
Freaky Friday.
Derek
All right. Well, obviously, as usual, there’s a lot going on between even just this week, the Fed and earnings and everything else that’s gone on. So I’ll start with a quick disclaimer. Thank the guys for coming on. I know there’s been some travel this week, but Dave Wagner, Head of Equities, John Luke Tyner, Head of Fixed Income. Thanks for making the time this morning. We’ll run through a few things that have been kind of on your mind and some visuals. I’ll do a quick 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’ investment advisory services can be found in its Form ADV Part two, which is available upon request. The month is over. All these numbers, I guess, are going to be a little bit better after today. It’s been pretty, pretty good.
Dave
Pretty, pretty good, for sure. Yeah, Amazon reported last night, it’s pretty amazing, stock’s up 13% today, so you’re exactly correct. D. Hern, we’re going to have a strong close to the not spooky month of October, but that doesn’t mean that there’s not a lot going on. I mean, it feels like each week is its own ecosystem. And given how high the stakes are right now, especially as we’re heading into earnings, we’re actually in the thick of earnings, it feels like a lot of us are just going to be prisoners to market context. And I don’t want to sound uber bullish because there’s probably plenty of things to worry about right now, but I think everyone needs to rehear the core tenets of this market right now. I mean, the Fed is easing financial conditions into a cyclical acceleration as the CapEx train continues to roll down the tracks.
We saw that this week with Meta, Google, and Microsoft. But if you want to be a serious bear right now, I suspect your timing needs to be impeccable, or simply the fundamental setup needs to change.
Otherwise, you’re fighting the Fed and fiscal stimulus and US mega cap tech. So I think I’m still the camp of the reasonably bullish approach as we head into the next few months with admittedly some more seasonality from a confidence perspective in November and December, especially relative to current month here in October. And returns were great this month. You have the NASDAQ up 4.3% today, which to Derek’s point, that’s probably going to be north of 5% at the end of today, which was definitely the catalyst. Mega cap tech, the concentration continues to be the linchpin of this market from a return standpoint. You saw small caps, they took a breather, EFA took a breather.
EM is still rocketing higher. I mean, that’s just been so strong really since the April 8th bottom. But even when rates were coming down this past month, and I know John Luke’s going to touch more on that here shortly, small caps took a breather after the strong September that they saw. I mean, small caps were up 12.5% in the third quarter alone. So I think the market’s digesting where rates are going, at least from the equity side. It’s probably a little bit different on the fixed income side that John Luke’s going to talk to. But again, the narrative continues to be the same here in this market. Own mega cap tech stocks and own not profitable, low quality stocks. That’s the only way to win in this current market right now. It does feel like the low quality rally, and anyone who’s talked to myself, John Luke, or the rest of the team here, we keep harping on the individual stock side, that it’s a heavy, low quality rally.
That theme, that thematic, that factor still drove this past month. And I do think it’s getting a little bit long in the tooth, but nonetheless, market has amazing, amazing results. Year-to-date, S&P 500 is up 17, could be close to 18 at the end of the day, and the NASDAQ could be up 25% in the first 10 months. So I think we’re starting to see another right tail type of year, much like we saw in ’23 with the market up 28%, ’24 with the market up 25%, and we’re bucking at 20% here in 2025 right now. So, onward and upward.
Derek
Average stock pops out a little bit. I know there’s been a lot of talk about breadth. A little surprised it was actually negative for the month, but I guess you’ve got some sectors that have just been dead weight.
Dave
Dogs. No other way to put it. They’ve been dogs.
Derek
So money’s coming into people’s hands, corporate hands. Maybe you can walk us a little bit through this because there’s a lot of interesting insights here.
Dave
Yeah, I’ll set the stage, John Luke, and let you frame it in a better way, because John Luke’s a big fan of the government and we’re talking about the fiscal impulse here right now. But I’ve been looking for a chart like this for quite some time to at least try to tangibly put some numbers in front of our partners showing the substantial impact that we’re getting from fiscal policy, not just heading into the end of this year, but it really starts to ramp up in the first three quarters of 2026. And that’s why I said at the very beginning of this conversation, everyone needs to remember and rehear the core tenets of this markets, the Fed’s easy financial conditions into a cyclical acceleration as fiscal policy continues to dominate the headlines, because we all know that water spigot is very difficult to turn off.
And the One Big Beautiful Bill that was voted on in this past year is starting to see some tangible results. More specifically right now on the corporate side of America, and heading into more parts of next year, we’re going to start seeing that more on the consumer side of things. So that’s why I think this chart is so great because not only does it show the overall magnitude and the effect of capital pouring into this market, it does a great job bifurcating it between the corporate side, which is feeling the benefits first, and that’s going to be followed up more so on the consumer side of things.
John Luke
Yeah. And if you look at any projections for deficits into the future, it looks like 6% is the new three or 4% that we saw the last 40 years, 30 years. And one thing that sticks out on this chart is, of course, the pop in Q1, Q2, and Q3 next year were definitely an accelerant to growth. But as you look further out, I would bet if you looked at these fiscal projections and into the future that it always looks like they’re going down. And then what you end up seeing is they get buoyed up by something. And so you’re just in this backdrop of nominal GDP running five plus percent, deficits running, I think 5.7 is the forecast for this year with some of the tariff revenue, assuming we don’t have to pay it back. But the situation is just, all right, 10-year bonds are at 4%, we’re running 6% deficits. It’s kind of hard to make a lot of sense of that. And this is definitely fuel for earnings for a lot of companies.
Dave
I make another point to you there that if tariffs do have to get paid back, that’s not a strict bear case here. Do you think that’s more of a bear case or bull case? Because we all kind of know who’s paid for the tariffs so far over the last five, six months. It’s consumers and corporations, more so corporations than anything. So would you see it as a bull or a bear case here?
John Luke
$200 billion check written to a swath of corporations seems like a pretty good deal. The backdrop from a liquidity, from a stimulative and stimulus and tax policy perspective is certainly favorable. And like you laid up, we’ve got rate cut coming and maybe another one in December, and we’ll touch a little bit on that. But the Fed’s balance sheet, which has been another piece of the pie that has been moderately restrictive, I know there’s been some gains with how it’s played with T-bills and repos and things to that nature. But if the Fed stops shrinking their balance sheet, I think typically that’s associated with good things for markets.
Dave
Fact.
John Luke
Yeah, so earlier this week we got the Fed cut. That was pretty much all but a guarantee. The big question from here is, how much more is left in the pipeline? So we’re sitting Fed fund rate at between three and 3.75 and 4%. So we’re 150 bips off the highs, we’re at 50 bips of cuts for 2025. And a key thing that we watch is the difference between the two-year treasury, which is the blue line here and the Fed funds rate. And the two-year treasury is going to be really a leading indicator for where the market is pricing future Fed policy. And as you can see, we’re still well below where the Fed fund rate is sitting.
So the magnitude of how many more cuts we get from here is certainly a question, but the market continues to want more cuts. And so the market didn’t love some of the commentary from Powell on driving through fog and December’s not a lock, but you can kind of see market reacting favorably this morning, at least as things kind of shifts back. So I think between the backdrop of the cyclical re-acceleration that we have, our call has been, it looked like the cuts in 2025 were likely, but it does seem more and more difficult to get a slew of additional cuts in 2026, but it does appear that the market’s still pricing a few more cuts in. And then-
Derek
And-
John Luke
Yeah, go ahead, Derek.
Derek
It doesn’t seem like it’s done much in anything for bond, we’ve just been stuck here forever for better or worse. You put this in here for a reason, obviously, and you talked about earlier, 4% yields in a five, 6% world is odd, but it’s there.
John Luke
Yeah. I mean, there’s certainly a number of things that the Treasury is doing that the government is doing to do some yield curve light type of maneuvering. And so I would say that if you ask Treasury Secretary Bessent if he was happy with how 10-year yields have reacted when he started focusing on that earlier this year, he’s probably pretty happy. And so we’ve been in this range between 4.5, 4.6 on the 10-year. We got down to close to three and a half last year, but it obviously popped back, but it’s been in this range, we’re hovering right around 4%. And again, I think a lot of the issuance from the Treasury is on the front end of the curve. There isn’t a ton of supply of longer-term bonds. The Fed’s implementing some buybacks where they’re buying longer dated treasuries and replacing them with T-bills.
And now you throw on top of that the fact of QT being in place and how the Treasury plans to kind of duration match as stuff rolls off. Well, the bulk of the stuff rolling off is on the front end, so they’re just going to continue to use this T-bill scheme to effectively finance the government. And the lower the T-bill rates, the better when you look at the interest expense line of the budget. And I think that it continues to point towards pressure on longer term yields, at least where we’re trying to hold them maybe lower than the market would like or would price them if there wasn’t so many factors moving into it.
But the simple fact is if you look at the tax receipts that the government gets in, and there’s a big story there on the dependence on asset prices going up. But if you take down the big three of the budget, so you’re talking about the entitlement spending, so Medicare, Medicaid, social security, veterans, things to that extent, add-on defense and add-on interest expense, you’re talking about close to or maybe even 100% of tax revenues are basically going to cover those big three items. And so it’s just a backdrop where it continues to point to the need to debase and grow your way out of this situation, which goes back to the point that you said, Derek, who in their right mind’s buying something at four when gross at six? And it’s basically locking in a sure loss of purchasing power in real terms.
Derek
Yeah. I mean, that’s been an ongoing story and doesn’t seem to be changing. I guess that’s part of the whole reason to own other assets besides fixed income in order to make sure that you’re keeping up and getting ahead with all that. You guys also put this chart in there, which I think we’ve seen different versions of it, and obviously it feeds into a little bit. You talked about at the beginning, even just this month, stocks are up, the big indexes are up, the average stock is not. Maybe this is part of that story, but I know Dave, you have probably inspected all 493 besides the Mag 7. So tell us what you know here.
Dave
There’s been a lot of dispersion amongst stocks in the 493, that’s for sure, Derek. I mean, the amount of incoming calls and messages about Fiserv, VRSK, some bellwether, mid-cap, high quality stocks. Fiserv was down 42%. VRSK was down 50%. There’s some high quality stocks that are just absolutely getting hit right now. But it all goes back to what we’ve been talking about really since the beginning of the year. The Mag 7 has the operating leverage characteristic that’s just embedded in what they do. And the bar continues to get lower for these Mag 7s on an earnings per share perspective. Heading into this quarter, EPS growth on a year-over-year basis for the Mag 7 was 14%. Half of what it’s been for the last four quarters. I think the Mag 7 has seen four quarters in a row where they’ve seen growth on a year-over-year basis of 28, 29 and 31%.
And so the bar just seemed low because people don’t understand the story of profitability and operating leverage for these companies. And what we’ve seen so far with the results of the Mag 7 companies that have reported, so your Apple, Microsoft, Meta, Amazon, Google, basically everyone but Tesla and NVIDIA and Broadcom have every product. Earnings results are unbelievable and that bogey bar of 14% was way too low. And to bring stuff back to the core tenant here, the S&P 493, they simply just don’t have that core tenant of operating leverage right now. So they try to digest a lot of these tariffs because right now we know that corporations are taking the brunt of the tariff costs over the consumers that is just weighing on profitability. And that’s why these stocks just haven’t worked here recently. I don’t think that’s a bad sign for the market at all right now.
I think we need to be optimistic about it and we should be happy that we have this core tentative operating leverage within the Mag 7 because no one else in the world has it. But the big question that I’ve been getting on this, because obviously the Mag 7’s working because of the CapEx spend. So everyone goes like, “Hey, Dave, are we in a bubble?” This is actually probably the conversation we should have started off with because it’s the number one question I’m getting right now. Are we in a bubble? Well, the only bubble I see are people talking about this being a bubble, because the spending is tangible, the spending is consistent. It could be sustainable. And I read something that was so beautiful talking about bubbles. Our education system, rightfully or wrongfully, just ingrains in our mind that all booms leads to busts. But that’s not always the case.
That’s just the bear inside of us always wanting havoc to be wrecked everywhere around us. We still talk about a bubble from the 1600s to this day, the tulip bulb crisis of 1620, or whenever it is. I can’t even do math for how long ago that was. I mean, John Luke, on one hand, could you name off five different bubbles that we’ve seen ever? It’s tough. You go to the housing crisis, you can go to the dotcom bubble. But I think the dotcom bubble is such a great-
John Luke
Maybe Japan.
Dave
Thank you. I knew you’d have more, always do. There’s good bubbles and there’s bad bubbles, and we need to recognize that. Bad bubbles are not… They will benefit productivity. So think bubbles and commodities, like tulip bulbs, gold, energy. That is an additive to society over longer periods of time. But the bubble, the dotcom bubble, obviously a lot of people lost some money. A lot of people made a lot of money, but that was a productive bubble. Where would we be without the internet in our hands today? I mean, the dotcom bubble happened in ’99 and 2000s. Facebook wasn’t invented until 2004, four years later. The iPhone right here wasn’t created in 2006 or 2007, seven years later. So I think we got to recognize that we could have, if it’s in the bubble, we’re going to be fine because it’s a productive bubble. I think we’re going to see more of an air pocket in the next few years, if anything.
But the benefits from a productivity standpoint, from this artificial intelligence, this advanced computing being more evolutionary than revolutionary, that is going to be such a long-term benefit to this market, directly benefiting the overall profitability of the market, which is the number one factor that the market likes to look at over longer periods of time that yield a higher valuation and better earnings growth. And the market loves increasing profitability, the market loves increasing growth. And that’s what this technology is bringing to the docket right now. In every conference we go to, that’s what people are talking about. How do I utilize AI in my business? What are other companies doing? Because they’re seeing the benefits from becoming more asset light because of this newfound technology. So as much as I sound probably like an uber bull right now, I think I love where our positions are, pardon me, I love where our portfolio is positioned right now.
And I’ll let John Luke talk a little bit more on that. We overweight stock, specifically the S&P 500, and we have guardrails in place in case there is some type of air pocket, which would be those puts would be a direct beneficiary if there was a pullback in AI spending because that’ll likely bring the overall S&P 500 down. So I would love to be a rational optimist here. I think you don’t fight this market, you don’t want to fight, you don’t want to spit against the wind of the US mega cap tech rate now. I think continue to ride the wave, just place guardrails in your portfolio in case we do see some unexpected turbulence or air pocket.
John Luke
Yep. I mean, earnings growth at 14%, and I know it came in higher, is a heck of a lot higher than where inflation is. So when you look at the backdrop of the first couple charts we showed and how stimulative that a lot of the measures are for the economy, for the market, well, a lot of stocks are benefiting from it.
Dave
You legit have revenue growth that’s greater than that 5%. Revenue growth came in last quarter at 6%. They’re expecting four, 5.5% this quarter. I think we’re going to get another 6% revenue growth. To your point, John Luke, not only are earnings crushing that new hurdle rate over the 10 years, revenue top line is beating it.
John Luke
Yep.
Derek
Yeah. And I mean, just as I go through and tying together some of your charts, this whole story, profit margins and government deficits and the economy and the bubble, Amazon’s probably the poster child for all of this, because all people are going to see is the headlines that they’re cutting 30,000 jobs and all you’re going to see today is billions added to their market cap, hundreds of billion of market cap being added because of the productivity and the profitability and all the rest of the stuff. So you have to be there. You have to have the exposure. There’s no way around it.
Dave
Spot on.
Derek
Cool. All right, guys. Well, thanks. I know there’s a lot of travel and appreciate you guys making the time to organize all this. I know advisors love it. Have yourselves a great weekend and we’ll do this again next month.
Dave
Happy Halloween.
John Luke
Get some candy.
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-2511-2