Aptus Quarterly Market Update: Q1 2025

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Full Transcript

Derek

Hello, hello. It couldn’t be any closer to the end of the quarter. This is pretty nice work by all, getting us ready at March 31st, 10 minutes after the market closes. We’ll give people a minute to make their way in.

All right, looks like we have a good crew. Let’s get to it in case we get wordy and the questions pile up. Kind of feel like the old Lenin quote about, what is it, about “Some decades go without anything happening, and then you get a week that feels like a decade.” It seems like that’s been the case of late, a lot of activity. And even just today was kind of a microcosm of that, big down morning and big up afternoon. So we appreciate you coming on. We’ve been making a habit of this. We do our abbreviated version every month, but then every quarter, the guys really just hammer out this quarterly market update within a few minutes of the close, and it’s great, pages and pages of charts and commentary. So we’ll go through it live, and just kind of discuss some of the topics. There’s obviously been a lot going on this quarter.

Just for introductions, we’ve got John Luke, head of equities, John Luke Tyner, and David Wagner, head of equities. We’ll cover, I’m sure, a lot of each of those areas. I’ll read a quick disclaimer and let the smart guys run with 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’ investment advisory services can be found in its form ADV Part 2, which is available upon request. And I will encourage questions along the way, just type them in, and when we get to them, we get to them. But fire away if there’s anything on your mind. But Dave, JL, thanks for coming on.

David

Thanks for everyone hopping on today. As you all know, Aptus wouldn’t be who we are today without many listeners on this call, so we appreciate everyone’s support. And please know that we’re always around if you have any questions, just an email away. But if you’ve been on one of these quarterly calls before, John Luke or myself, we always like to start off with some type of monologue. It’s a little bit something extra, but I would say that we hope that it always tends to be a little bit more uplifting than anything, and I don’t think that there’s a better time to do something that’s uplifting than what we could right now, especially in today’s market environment. I mean, given where the pessimistic sentiment is, I mean the volatility in headlines, volatility in emotions, I truly believe that as investors, we just need to take a step back.

We need to see the forest through the trees, and right now, my word for the quarter, and it probably could obviously bleed into Q2 of this year, but it’s “Perspective.” That’s my word of the quarter, is “Perspective.” Because as investors, we need to keep everything in perspective, and I think I have a few cool little talking points that I can walk through right now, that puts perspective on the current market. But we all know that pullbacks, they’re normal and healthy. Markets that just go straight up without really any volatility, much like what we saw in 2023 and 2024, that’s the outlier. Those are the market conditions that are abnormal, because markets don’t move in a straight line. Again, pullbacks, they’re healthy and they’re normal. The second point of perspective is that all bear markets start with a correction, but not all corrections turn into bear markets.

If you go back to, I think it’s like 1945. So for most people at home, let’s just say since World War II, I think there’s been like 39 instances where the S&P 500 is declined by 10% or more, but only 13 of those 39 instances actually turned into bear markets, where the market pulled back more than 20%. So that’s

only 33% of the time. The third reason to keep the markets in perspective is that the sentiment right now, surrounding this market, is worse than the sentiment during COVID and the sentiment during the financial crisis. Yet if you put things in perspective, the market ended the first quarter of this year at levels not seen since September of 2024, a mere six months ago. The market officially had one 10% pullback year so far in 2025, but if you look at the two aforementioned periods of COVID and the financial crisis, the true peak-to-trough pullback for those time periods with like 33.8% and almost 55%, yet the sentiment right now is worse, just after one 10% pullback. Let’s keep things in perspective.

And the last reason to keep things into perspective is more so along the lines, just don’t bet against the consumer, and don’t bet against the resiliency of corporate America. I know that macro news, what we’re seeing on a daily basis, can seem very overwhelming, but just remember it’s all about stocks, which are all about the underlying businesses. We knew last year, the S&P 500, pardon me, last quarter, the S&P 500 grew earnings by about 16%, and they’re expected to grow earnings per share this quarter by another 11%. So perspective, it’s key, because consumer behavior is very, very simple. Investors hate losses, and they have little patience for Washington DC policies that might not immediately contribute positively to stock market returns, much like we’ve been accustomed to with quantitative easing. But right now, I spent most of the day writing our newsletter for the quarter, and as many of you guys know, it tends to be very thematic. And this quarter’s theme is D.B. Cooper, and for those that don’t know, he pulled off one of the most successful airplane hijacking stories in US history.

Well, potentially, because his whereabouts have really been unknown since that incident in 1971. So it’s FBI, it’s considered their biggest unsolved mystery. But I can tell you right now, that predicting the stock market, that’s forever going to be an unsolved mystery. We don’t know what the future market returns will be, but I’ve learned that… If I had this chart up first, I’m sorry. But I’ve learned that the more certainty that you have in markets tends to lead to worse returns over longer periods of time. That’s why investors, we need to focus on what we can control and prepare for what we can’t. We don’t know where the market’s going to head in the future, so focus on these controllables.

And during periods of time like this, I think it’s just very important to do all the blocking and tackling that you can as advisors. Things like constant communication with these clients, and maybe looking for some tax loss, harvesting opportunities. That’s the blocking and tackling that we need to do right now, because future market performance, it’s an unsolved mystery. We can’t control it. So I would say go out there, chop some wood, and make sure you try to keep everything in perspective right now, during these volatile time periods. Last thing I would say is tomorrow, hopefully by midday, John Luke, myself, and the rest, and JD, and the rest of the IC team, we’re going to try to have our quarterly investment chart book out tomorrow, so you should be on the lookout for that.

Actually, I’m going to do one more. John Luke, I got a question, I think it’s really good to start off with this before we kind of head into your fixed-income market review. Let’s go. I play a game called Wavelength, it’s basically like can I grade something from one to 10? And let’s get your perspective, John Luke, since that’s the key word of the quarter and the month right now. How worried are you on this market right now, from one to 10? But then let’s look at it from a time series analysis, maybe if I asked you that question 12 months ago, how worried are you about this market from one to 10, back in March of 2024?

John Luke

Yeah, I think it’s good to put it in perspective, as you said. I think that if you asked most clients, it would probably be at the top end of that range, seven, eight, nine, based off of what they’re seeing on the headlines. I think when you chop through it, and I’m looking forward to hitting on a big chunk of that list at the end, or towards the end of this, but really, it’s below five, for sure. Maybe it was a three and now it’s a four, something like that.

David

If I were to answer, I’m surprised by your answer, because I would say last year was also a three, it’s probably maybe a four, four and a half now. And so keeping things in perspective, things are still pretty strong if you look at the underlying economy.

John Luke

Yeah. So we’ll charge it off with fixed-income update. I think what we’ve seen this quarter is well received by most fixed-income investors, positive returns generally, across the board. You saw the 10-year treasury rally substantially from the highs, back right before the inauguration, where the 10-year fell from about 4.8% to about 4.2%. The two-year rallied from 4.2 to about 3.9. And so you saw a substantial move in duration, where yields moved lower, longer duration did perform pretty well, which was a bit different from what we’ve seen the last couple of years, where duration has been troublesome. I think the one kind of low light of the quarter would really be some of the more risky parts of the markets, where credit spreads did widen pretty significantly, and it ate away at some of the returns from that aspect. Another positive that you saw was bonds did a pretty decent job of insulating some of the weakness in stocks, where you actually got the negative correlation this quarter, that you haven’t seen for quite a while.

And while I think it’s probably a bit early to throw in the towel, and say that the coast is clear moving forward, it was nice to see bonds re-rate a bit lower. And there’s obviously a number of things that have hit on that, whether it’s the tariff policy and what’s come out of DC, whether it’s some growth scares, specifically in the softer data that markets have gotten tied up to, and just a little bit of a wobbliness in equity markets, have led to decent performance for bonds, from both an income perspective, because again, yields have been higher, so your interest piece of the return profile is more attractive, but also from the rally in rates. I guess the one outlier too, Dave, I think is not only did long-term bonds perform a lot better than they have been, which has been a big talking point of many of our conversations, but TIPS did well, as investors continue to fear short-term impacts on inflation from tariff policy. As you can see at the bottom there, TIPS were up a little over 4%.

Yeah, next one, Dave. So I think that these two charts really caught our attention. I think that it’s really two-sided. The first chart on the left, talks through performance of different treasury durations since the lows in August of 2020, so before the hiking cycle, but pretty much at the low-end rates. And what you see is the short-term rates did better because they were much more insulated to rising rates, and you got income more quickly, to reinvest back in. But the big one on the list is the downturn in treasury bonds and long-term treasury bonds, like TLT, where total returns are down over 40% over that period, which is not something that most investors are typically associated with. Dave was actually talking through a fun fact on… Dave, what was the time it would take for TLT to break back even from an income perspective? Was it like 17 years?

David

Almost 40 years. I thought it was like 40.

John Luke

Yeah, it was a wild stat, in terms of just digging out of that drawdown. And obviously, rates would have to go basically to zero in order to get the price return back up on those. But I think what’s been maybe a bit more puzzling is just the performance of bonds since the first rate cut last fall, where you haven’t seen bonds rally as they have following most rate cutting cycles. And as you can see, the lagger in the performance is still TLT, where even though the FED cut rates 100 bits, TLT is negative. And that’s something that markets aren’t necessarily used to. I think we are getting into maybe a little bit different backdrop of less focus on inflation, more focus on growth, and you’ve heard Scott Bessent talk pretty adamantly about trying to get longer term yields down. But it is notable that since the first rate cut, the shortest duration, bond duration type of investments, continue to perform best.

And then I think the last piece to highlight, is you had seen spreads get to anemic types of levels, extremely tight in terms of the spread, from whether it was investment grades or whether it was high yield bonds, their spread to treasuries were extremely tight. You can see we were well below the five-year average that we show here on this graphic. And really, what you’ve seen is just a bit of a normalization. So as interest rates have fallen, the five-year drop to about 70 basis points from the highs, so you’ve seen spreads just repriced to accommodate the decrease in risk-free yields. So while it’s been a big pop if you look at it on a very microscopic type of lens, when you back out and look at it from a higher perspective, there’s just a move back to the average, and a lot of it’s been accounted for by just the risk-free rate declining a good bit over the quarter.

So I think to sum it up, you’ve got a FED that’s in a little bit of a tough spot, because the inflationary data continues to be a little bit stickier than what they would like to cut rates. You’ve got the employment market, which continues to be relatively strong. You’ve got soft data, which has been a little bit more wobbly, but hard data continues to look pretty solid. You’ve got a backdrop where the FED’s telling you to expect about two rate cuts, in terms of their pricing. The market’s pricing at about three. And I think when you put it all together, if the economy and the labor market and growth continues to be resilient, I think that it’s more bifurcated of less cuts than what the FED’s expecting or more cuts in reaction to something negative happening.

And so while the market has priced in this narrow backdrop of two-ish rate cuts, we would be less surprised if we got less than two, or more, in the face of a weakening labor market. But I think the benefit is that the FED does have room to cut from here and to react to bad news, which should be a positive for other parts of the market, in turn with the rate cuts that have already happened flowing through to the real economy on somewhat of a lag. And we’re still probably just now starting to feel some of the consequences of that.

David

Those are some great points, John Luke. I like how you kept bringing it back to perspective, obviously the word of the quarter here. But we all know fixed-income wasn’t the problem in the first quarter of 2025, it was obviously the equity market that was more the problem child, or the nail that stuck out the furthest, since you finally did see a little bit of an inverse correlation between stocks and bonds. But I would say at the core, the market ended up pulling back on the quarter, and now also year-to-date, by about 4.3%. I think the overall theme of what’s going on here within the equity market, is that basically policy hyperactivity has now been overshadowing the animal spirit that we’ve been accustomed to, whether it’s since the November election or the recent market bottom, going back to whether it’s October 12th, 2022 or October 27th, 2023. But the first quarter basically delivered a classic third-year bull market correction, falling 10% from its highs before rebounding and finishing only down this 4.3% during the quarter.

But the recent sell off has been more centered around, I’d say, probably three prevailing culprits, and that’s going to be a momentum unwind. It’s going to be policy uncertainty, i.e. tariffs, and then a gross slowdown. I would say that one of the biggest highlights, or the key to the quarter for me, was that the market definitely started broadening out to more of the previously unloved areas of the market. Enter stage left, international markets that were up 8.1%, as investors virtually just rotated out of the Magnificent Seven, which became a funding mechanism into the cheaper areas of the market. Well, I’d say except US small-caps, that were down about 9.5% during the quarter. But if we take a step back and go back to perspective, it’s kind of stunning how much is going on right now. And even if implied volatility has started to settle down, the VIX back to 22 right now, the market continues to digest just a huge range of significant variables, and the results of those significant variables will likely be a trading environment that’s profoundly different than what we’ve been accustomed to over the past few years.

Much like I mentioned on the monologue at the beginning, pullbacks are healthy, they’re normal. The markets that have gone straight up with virtually no volatility and no pullbacks, that’s the abnormal side of things right now. But I think the root of all market hesitancy, the biggest single obstacle in the market right now, at least for me, it’s uncertainty. Tariff and trade policy is a total unknown, and headlines are volatile. We’ve had major government institutions that are being gutted or outright closed, and the administration officials are kind of openly acknowledging the possibility of a recession. And that’s basically this cocktail of uncertainty has just hit consumer and business confidence, slowing economic momentum. And you combine that with elevated earnings heading into this year, and a lot of bullish optimism, where everyone was highly levered up on US stocks on the Magnificent Seven, that basically just gives you a recipe for correction, and that’s what we saw during the quarter, but that’s healthy and that’s normal.

And as I continue to rotate my slides, we’ve had a few questions come in already. And as myself, John Luke, and Derek always do, we do these things live, so I’m going to try to answer some of your questions live, as we go through a few of these different slides. But anyone who hops on any of our calls has seen this chart on the left side, ad nauseam. It does talk about pullbacks being healthy, it talks about them being normal, but more importantly, their frequency. On average, during the calendar year, we see three 5% pullbacks, and a 10% pullback every 12 to 16 months. And that’s really what we’re going through, because we haven’t seen a pullback like that, really going back to October of 2022. So remember, pullbacks, they’re healthy, they’re normal, they’re not a cause for concern, and when the markets go straight up to the right, that’s when it’s abnormal.

But the chart on the right, shows you also, the item of perspective I gave you at the beginning, is that all bear markets start with a correction, but not all corrections turn into a bear market. A correction is considered a technical move of the S&P 500 by 10% or greater, and a bear market is to 20% from peak-to-trough is considered a bear market within the S&P 500. And of all these corrections that we’ve had, only about 33% of them have actually turned into bear markets themselves, so keep that into perspective. But if we really go underneath the hood of the market, I truly believe that the three things driving this market down, it’s mostly a momentum unwind. I think in second place would be growth uncertainty, and the third would be more policy in Washington DC. But this chart on the left shows you that if you look back over the last, call it five growth scares that we’ve seen in this market, excluding COVID, 2022 was more of a rates driven market. COVID was very much an extraordinary event.

It tells you that the average pullback when you get some type of growth scare, going back to the financial crisis, is about 16%. We’ve only pulled back about 10% peak-to-trough, so we’re below historical averages. But again, that 16% average is just an average. But if you head into recessions, on average earnings per share, growth at the S&P 500, when you head in towards some type of recession, is about 2%. I mentioned earlier on this call that growth last quarter was 16%, and growth this quarter is expected to be 11%. So the consumer remains very strong, which is not always the case in all these aforementioned five periods where you had another growth pullback. So the consumer remains strong, but also the health of corporations and their balance sheets remains so much better off than what we saw in 2010, ’11, ’15, ’16, and ’18.

So this chart on the right, I think is probably one of the most polarizing charts that we could probably have here, because it’s talking about this momentum unwind. And I said that the pullback would be more growth concerned, DC tariffs, but it’s probably a little bit more of a momentum unwind than anything. And this could probably dovetail into a conversation a little bit later on, when talking about international markets. But it may come to the surprise of many people that capital flows can significantly impact market pricing. And in 2025, we’ve seen meaningful outflows from the US mega caps into international equities. And absence, like some type of fall through on major volatility indicators, like oil interest rates and developed and emerging market currencies, suggests that the key drivers is probably this momentum unwind. Let me explain that.

If tariffs were the primary catalyst of this pullback, I’d expect heightened volatility in the currency markets. If growth concerns were at the core, oil and interest rate volatility would be spiking. Instead, the broad lack of volatility confirms what this chart is signaling, that this is more of a momentum unwind. In my opinion, that’s the dominant force behind these market moves, and it’s really just the mega caps being the funding mechanism to the cheaper parts of the market. The last thing I’ll say before I pass it to John Luke to kind of touch base on a few things, is that there’s so many taglines you could have out there, like “MAG Seven, more like lag seven.” But the really big thing that surprised me in this market, is that when the capital’s flown out of the mega caps into the more unloved and undervalued areas of the market, it’s kind of left small-caps out of the party. Small-caps, as measured by the Russell 2000 core benchmark, was down 9.5%.

And so what’s going on here? I think the R word, which is recession, that’s the worst word for small-caps. Whether it’s regional bank stress, the meme stock volatility, or rising rates, it feels like there’s always been something holding back small-caps recently. So with recession concerns resurfacing, small and mid-cap stocks, they’ve just taken more of a hit than you typically see in the early stages of a slowdown. But fundamentally, it has been a tough stretch for small-cap. As of the first quarter, I think small-cap earnings growth is projected to finally outpace large-caps in the second half of this year. We’ll see if that actually comes to fruition. But unless growth like meaningfully re-accelerates, I think the potential leadership shift may take a little bit longer to materialize. I do think that small-caps still are a great diversifier for an overall allocation, specifically with the concentration in mega caps. But valuation still remains very palatable in the space right now, so let’s just hope for some type of growth pullback.

I’ll stop there, take a breather, and maybe we answer some questions, John Luke, or move on to the macro side of things.

John Luke

Yeah, I’m good on either.

I think some of the macro points will address some of the questions that we’ve gotten, just based on kind of where they’re at.

David

Yeah.

John Luke

So do you want to pull up the good, bad, and ugly, sort of our token slide?

David

Yeah.

John Luke

I think this is one that puts a lot of things in perspective. And how I’d start it off, and hopefully we’ll have a good dialogue back and forth here, Dave, but consumer spending follows jobs, and bad feelings don’t always translate to bad news for the economy. That’s kind of where I’d like to start it off, where the good part is the consumer continues to be resilient. They’ve got a lot of capital that they’ve either earned or given in some capacity, the last couple of years, based on market performance, based on a lot of the fiscal deficit that’s flowed to the private sector, et cetera. And so I think that while the perspective of things might be negative, betting against the consumer has been a bad bet historically.

And so when I put it into perspective, my question is are we going to stop running deficits at the economic level? And last year, for reference, we ran a 6.4% for the fiscal year ’24 deficit to GDP. If you look at Scott Bessent’s Three-Three-Three policy that he’s kind of led with in a lot of his conversations, it’s a 3% deficit, but achieved by 2028, it’s real GDP growth of 3%, and 3 million barrels of oil per day. So many different things to kind of unpack through that, but the goal is to bring down inflation with more oil. The goal is for real GDP growth from the private sector, and then the goal is for the government to be a lesser part of the economy than what they have been. But that’s happening over the scope of three years, it’s not like it’s necessarily going to happen immediately.

And so while I think the DOGE lines have certainly hit the headlines, it’s more of a change up from the 2017 Trump administration than it is to today, where he led with a lot of the, quote-unquote, candy of tax cuts and deregulation, and then came in at the back end, with tariffs. Whereas this time, he’s leading a bit more with the spinach, kind of like mom at the dinner table when you’re a child, and then if you eat it, you get the dessert at the end. And so I think that that’s sort of the backdrop that has scared people, but when you kind of put it into perspective of points like that, it’s a little bit less troublesome.

David

I think we can go to a question real quick too, since we’re talking tariffs. We spoke a lot about tariffs on our mid-quarter markets and turmoil, quote-unquote, making fun of CNBC. We spoke about our thoughts on overall tariffs, we could touch more on that if you’d like. But let me see, I think we had a question about tariffs right now.

Yeah, here’s a question. We’ve read a lot about companies stocking up on inventories right now, whether it’s auto dealers prior to tariffs taking effect. What is your read on economic activity being pulled forward and the future quarters may be poor as a result? Let’s keep things into perspective on this. I read a pretty cool statistic this quarter, it’s actually from John Luke, and if it breaks down GDP, if it bifurcates GDP, those affected by tariffs and those not affected by tariffs, only about 15% of GDP is affected by tariffs. The residual 85% means that it’s going to be more domestic in nature, basically unaffected by tariffs, and 85 is greater than 15. And I think keeping things in perspective of whether we look at it as a percentage of consumer spending, the overall tariffs, a percentage of GDP, or a percentage of earnings per share of the S&P 500, it feels like it’s definitely a lot more of that spinach that John Luke is talking about, rather than candy. Would you add anything to that, John Luke?

John Luke

I think the other thing to put into perspective is remember back in 2022, as the FED was communicating the need to raise interest rates and do it pretty drastically to hone in inflation, and that was a hit to the market in ’22. Things weren’t so friendly. But after the market digested and got used to it, you had great years in ’23 and ’24. So I think my perspective is it’s a little bit of once the market gets some tariff fatigue and companies communicate through their earnings, the impact, and we get a grip of what’s going to happen, and changes are made, then you kind of get a similar type of backdrop, where it’s less of a headline type of shocker and more just a part of the economy that you get used to.

David

Yeah. We’ll probably repeat a little bit on this next question, but it’s also on tariffs, John Luke. I guess we all know the topic du jour of this past month, some Washington DC volatility. But the question is, “In past discussions you’ve mentioned that we’re at year-over-year consumer spending of 6.5%, key positive GDP expected to be around three to 6%. Is that recent six to 5% consumer spending number, is that still correct? Goldman Sachs has stated that tariffs could lead to year-over-year going to 5% for GDP. Do you agree with this still or the case for tariffs moving forward, is it more broad-based than originally thought. Trump himself, over the past weekend, said it’ll be broader than the 10 to 15 countries originally thought.”

Let me start off with making two points. We do know that almost 70% of GDP spending comes from the consumer itself, and then also most GDP readings are put out in real terms, not nominal terms. So this question was put out talking about GDP in that three to 6% level, yada yada, that’s kind of adding back inflation to give you that nominal number. But overall, that 6.5% year-over-year consumer spending, it has pulled back just a little bit to that 5% range. And what we’ve spoken about a few times is that the consumer remains very strong. Historically speaking, the average year-over-year growth for consumer spending is between three and 6%. And one of our partners came out with a statistic, pardon me, saying that if all these tariffs were imposed, and obviously, this is a very fluid number, it’s basically a $300 billion consumption tax on the consumer itself. And relativity, that means that’s a haircut to consumer spending of about 1.5%. So if it was 6.5% last month, it might be 5.7% this month, that consumer spending on a year-over-year basis, that could take consumer spending down to 4.2 to a little bit higher.

But again, that’s still right in that Goldilocks period of the average year-over-year spending for consumer spending is between three and 6%. And in a way, if we get that haircut to consumer spending, that could actually almost negate some of the other clouds out there in the market, such as structurally high inflation. Because a lot of people believe that consumer spending, bidding up prices for these increased inflated prices of goods, it would keep that trend continue to moving. But if you pull back a little bit that on the consumer spending, that could maybe negate some of the headwinds or the worries of this inflation moving forward into the future, which could maybe create a more accommodative FED policy there. So I would say that yes, the consumer remains very strong right now, and I think if there was any time to implement tariffs for the consumer, right now is an okay time.

John Luke

Yeah. And I think, Dave, we hit on a couple of the goods. You talked about the resilient S&P earnings. I think another one of the S&P pieces is just the monetization of all the AI CapEx, where companies, they invest in things to make money off of them. We saw substantial investments in different AI technologies and capabilities the last year specifically, and it’s been going on for longer than that. But I mean at some point, you got to think these companies are going to want to see that turn into real earnings power. And so I think that that could certainly be something that many people are maybe under-looking, or at least not thinking about when looking at earnings expectations for markets and the potential to exceed what’s being priced in.

David

You’re just nailing everything on the head right now, John Luke, with some of these questions. Because we had another question just come in kind of talking about AI in the mega cap parts of the markets. It goes, “We’ve had another sharp sell off of the most expensive high growth part of the market. The last time this was a persistent effect was after the tech wreck of 2000 to 2002. It lasted for a decade, as markets rotated out of growth and into other asset classes. In your opinion, is that where we are now, or just another bump in the long-term growth of the AI narrative?”

I think how our minds work, from a behavioral standpoint, we do believe that history doesn’t repeat itself, but it rhymes. But we always want to relate current period to some period in the past, and it’s kind of difficult to compare the tech bubble and what we see right now. Because you’re correct, those companies, those styles, high value, high growth, they’re basically put into a penalty box for almost 10 years, where from 2000 to 2010, that was the decade of international. From 2010, basically up until now, it’s been the decade-plus of the largest of the large mega-cap tech stocks.

And are we going to see that transition happen again? I think we’ll have a slide here talking about international, what’s kind of been driving international. Maybe we head to that next John Luke, and then kind of bounce back to the macro side. But there’s a lot of differences today with these mega-caps versus back in 2000. Back in 2000, a lot of these dotcom types of stocks, they were funding their growth off of equity issuances and a bunch of debentures, so increasing the debt on their balance sheet. If you fast forward to today, these Mag Seven AI stocks, they’re a funding mechanism for their own growth, where they don’t have to hit the debt markets, they don’t have to hit the equity markets themselves, they can fund everything by free cash flow. So I’m not expecting anything of these types of names being put into the penalty box for a long span, like a long standing period of time. Because one thing that we learned during Q4 earnings season that just occurred all of month ago, is that the spending has not slowed down whatsoever.

If you go back to October of last year, the expected CapEx spend was like $281 billion. Fast forward today, like five, six months later, it’s closer to $313 billion expected spend here in 2025. That’s a 13% increase in CapEx AI type of spending by the Mag Seven, increase just over the last five, six months. So right now, we haven’t seen a full transition of CapEx or spend at any cost, transitioning to growing down on profitability. I think that long runway for CapEx continues to be there. And we all know that one man’s CapEx is another man’s revenue, and that should keep ultimately, the growth in the market to be better than average.

And to whoever asked this question, I think one thing you go back to is our market outlook heading into 2025, it was based off of the 1980 movie Airplane. But it’s showing you that, hey, we may have more tails in the market moving forward, whether it’s right tails, like we witnessed in 2023 and 2024, or almost left tails, I don’t think we’re there yet for what we’ve seen here in 2025. That at the core of the S&P 500, given it’s 36 or 37% concentration at the end of today, is that it has this new found characteristic of operating leverage, that when operating leverage works for you, it’s amazing like the last two years, or maybe you can start cutting against you if actually growth really starts to pull back, we start to see more left tails.

But right now, the spending just continues to be there, so I don’t expect these names to be put in the penalty box for a substantial period of time.

John Luke

And just a peanut gallery comment, with the performance of a lot of those names to start the quarter, you’ve gotten a re-rate in multiple, back down to pretty tolerable levels, some of the more attractive levels we’ve seen in the last couple of years. And if you compare that to anything from the dotcom bubble, which from an earnings perspective was much weaker back then, and from a multiple perspective, was much more expensive, much more hopeful for the growth. That it happened, but it didn’t quite happen like markets had priced.

David

I love that. John Luke, I’m going to audible, because we’re wild cards here, because we keep having some more questions come in. And if people are asking questions, I know if one person’s asking it, probably many people on this phone call are also thinking it and want to ask themselves. And I think this is the great debate right now, and it’s all about international stocks. And so the question is do you see any potential for a rotation or reversal of asset class performance for the remaining part of the year, such that US equities could outperform international or fixed-income for the remaining of the year? What would that scenario look like, tariffs not coming to fruition, this or that?

I’m going to be more holistic here, and it sounds like you want to kind of take the more rightful approach from my shotgun approach on this answer, but international has substantially outperformed domestic stocks year-to-date. In fact, it was the biggest out-performance on a quarterly basis, I think, going back over the last 23 years. Don’t quote me on that, but I think that’s 98% chance that is correct. So the largest quarterly out-performance of the last 23 years probably. Why have equities underperformed international here, at least the domestic stocks? Well, I think that there’s probably five reasons, and that’s Europe, on the first, one is still easy monetary policy, even as inflation remains above 2%, while the US appears to have finished its tightening cycle. The second reason would be that Germany and other European nations are expected to expand fiscal stimulus, increased defense budgets, and reduced reliance on long-standing EU constraints. In contrast, the US is beginning to cut its fiscal deficit, and that may act as a drag on domestic growth while Europe is still in expansion mode.

The third one, and I think that’s probably the most largest reason, is that after years of over-weighting US equities, global investors are beginning to reallocate stock, reallocate capital, pardon me, into international markets seeking broader exposure. The fourth reason would be that earnings has become more evenly distributed across global markets, while the Mag Seven is post-outside the earnings of the last two years. Many international markets saw modest, or even negative growth, and this is really just setting a stage for some type of potential catch-up.

I think the last factor is this, is just more of a valuation catch-up. Historically, international markets have traded at an 8% discount to the S&P 500. They’re trading closer to a 50% discount. And what we know of valuation, it tends to overshoot intrinsic value of where it probably should, when the dust settles, where valuation should be. So maybe the 50% discount somewhat overdid that on the valuation side of things, and this is just a catch-up on valuation off the hopes and dreams that growth is going to pick up. Last thing I would say, John Luke, I want your opinion here, is that do you chase this international rally right now?

I would say I’m not there yet personally. John Luke may have a different opinion. I’m okay missing out on the first and second innings of some type of regime change, to be able to participate maybe innings three through nine. But more importantly, we’ve had so many head fakes in the international space over the past, let’s call it 12 or 13 years. I want to make sure that a lot of these policies, whether Germany’s putting out the stuff that they passed through their government two weeks ago, or the defense spending elsewhere, a lot of that comes to fruition. We’re not sure that it will. Because there’s an ever-changing dynamic on headlines here domestically, that may change some of the opinions on the international side, because they don’t want to spend the capital. We know Germany has a debt to GDP of like 71%, where they can go and spend, but that doesn’t mean that they’re going to, if the US is still going to continue to subsidize a lot of their defense spending, and stuff like.

So let’s wait for a lot of those facts, or those hopes and dreams, to become tangible. And I think that’s when I could get a little bit more ecstatic or interested on the international side right now. But right now, all the return is solely driven by evaluation. So I’m not saying to fade it, let’s just continue to watch this.

John Luke

Yeah. And I think is it really a regime change? And we certainly have seen some insulation from where multiples were relative to start the year. It’s a show-me story to me, from that perspective. And then I think one comment just on the allocation. From an allocation perspective, we’re typically underweight internationals, but we’re overweight equities in general. And when you look at the net difference, we’ve still got enough international exposure in the portfolio to not be an eyesore if they continue to rally, even without doing anything. So I think that’s kind of a safety net that we have. And then the other part of the question was US equities outperforming fixed-income. I think fixed-income had a great quarter, with the backdrop of potential slowing growth, maybe the hope that the FED would get it into gear to continue the rate cutting cycle that we’ve seen.

But I think that if you do get past and digest some of the news, that you can kind of get the best of both worlds, where US equities specifically, are able to get back in the limelight of the news and the backdrop, from a realization that “Hey, earnings are still going to be good, maybe the headlines aren’t going to be as impactful on things as maybe what’s feared.” And then for interest rates, in order to continue to have quarters like what we just saw, you’re going to need to continue to see rates drop pretty drastically. And so I think in order to see rates really drop drastically from here, you’re going to have to have some real degradation in the economy, and that’s not something that I think we’re comfortable calling at this point.

David

That’s such a great point there, John Luke. It’s always a battle like international or domestic, it’s either one or the other. It can be both. You don’t have to pin each other against each other, you can still win at the allocation level by just being overweight stocks and maybe a rising tide that lifts all boats. It’s really just been an argument of US versus international because international has had negative performance. They both could have great positive performance moving forward in the future, where they could still work together. But at the end of the day, I want to own something that actually has sustainable tangible growth, and that’s why I tend to still skew a lot of my opinions on owning US domestic stocks.

John Luke

Yeah. And Dave, I think that one of the next slides that you had was going through… Well, we can start here. But the periods of policy uncertainty, and just how those have typically alluded to decent forward-looking returns. And kind of like you led with here, Dave, I think it’s pretty wild to think that the last month or two, from a sentiment perspective, has gotten more negative than a lot of really bad things that have happened over time. And really, the tariffs are just now going into effect, and we don’t even really know to what extent that they will, or what the actual appetite is for tariffs. If they do create some kind of economic turmoil to have President Trump kind of backtrack a lot. Because at the end of the day, we still think he’s a market-driven guy, and a lot of this could be more talks than reality.

So my comment on this is just from a multiple perspective, you see a lot of things re-rate to more tolerable valuation levels, and then you’ve got a backdrop of a lot of pessimism. So if you just get a little glimpse of something kind of good, I think it could change things and become pretty favorable pretty quickly. And you kind of saw that today with the reversal in markets.

David

Yeah. Yeah, that’s why I love your analogy, John Luke, the candy and the spinach. Previously, we got the candy first then the spinach, now we’re getting the spinach first, then hopefully the candy itself. But I don’t know about you, JL, but I would actually say that the candy that we could have in store could substantially outweigh the negative effects of the spinach. Let me say that in a different way. Obviously, the spinach is tariffs, that cut into maybe two to 3% of earnings per share of the S&P 500, or 1.5% of consumer spending, and maybe 1% of GDP. But the benefits from deregulation, in my opinion, almost prompt, no pun intended, we all know I’m not political, I always vote for Ronald Reagan in elections, but I think the deregulation factor itself could outweigh, on a positive economic balance, the tariffs. Then you throw in maybe some tax policy changes. I’d put more weight on the candy here, moving forward, than the spinach.

So it is pretty crazy to me that there’s a lot of policy uncertainty right now. But if you look at any soft data versus hard data, soft data right now looks absolutely terrible. And I think there’s such a great delineation we need to make between soft data and hard data. I thought I had a chart in here, let me try to find it real quick. What’s the difference between soft data and hard data? Well, soft data is based off of surveys, hard data is based off of tangible data itself. And I think a lot of people are just trying to figure out when does the soft data, the survey data, start to move into the hard data? And I would say maybe it won’t, okay? Because at the end of the day, soft data is just surveys. That sentiment can change, because right now there’s a lot of policy and uncertainty. But we just see nothing flows through the hard data. I would start to get more worried about this market, because me and JL both started off this call ranking.

Our optimism on the market today versus 12 months ago, we both said, “Hey, we were worried about a three out of 10 last year, and we’re worried a four out of 10 right now.” My number, if my number were to increase from that timeframe, to maybe a five or six or seven, it’s when that data goes from the soft data into the hard data. But outside of ISM manufacturing data right now, you’ve seen no flow-through from soft data to hard data.

Derek

One thing I think that’s interesting too, on that topic of hard data, and your opening frame of perspective, I would say in general, that CEOs of companies, publicly-traded companies, are probably a more welcome site for investors than politicians and economists that we’ve been witnessing over the past month. So earnings, I know they’re not this week, but it’s late next week. I’m curious what you think the tone of the calls… We had the question earlier about our tariffs pulling forward some of the demand, or do you think that as we start to get a little less macro, a little more micro, and we hear from some of these innovative companies about what’s going on and how they’re taking advantage of the environment, and all that kind of stuff, do you see opportunities there?

And I didn’t see a chart in here, maybe it’s in here somewhere, but I know you’ve shared it before. The point about no recession has started, and the past whatever, five, six recessions, they’ve all had 2% average earnings growth, and we’re still sitting at double-digit earnings forecast. So I’m curious how you think that the earning season can change, can shift the tone a little bit on things?

David

At the end of the day, that’s why I love this phrase here, Derek, and it’s in our chart book, that macro news can seem overwhelming, but just remember it’s still all about stocks, which are all about underlying businesses. And when I talk tariffs, I always say that there’s this old man saying that… It’s old man yelling at the clouds, it’s like the only thing that matters to the market at the end of the day, is macro economic growth, whether it’s from earnings per share of the S&P 500 or the propensity of the consumer to spend, and both of those are just very strong right now. I think the thing that the market’s trying to digest on the slowing growth, because that’s been one of the narratives for this entire quarter. I think it’s not as structural in general, as many people would assimilate. I think that the first quarter earnings expectations started off the year like being 15% higher year-over-year, and moved down to about 11%.

I think there’s really two reasons, maybe two and a half reasons, on why you’ve seen expectations for this quarter move from 15% to 11%. The first one is going to be that last quarter, in the fourth quarter, the pull forward was just absolutely amazing other than the amount of growth. We grew at 16% in the fourth quarter of 2024, which was only expected to grow at 12%. So the initial knee-jerk reaction, a lot of economists and Wall Street analysts, is that, “Well, hey, that’s just a pull forward in demand. I’m going to take some of the growth out of the first quarter and move that into fourth quarter to try to reconcile my numbers.” So that’s kind of why you’ve seen that number come down from 15 to 11%. But also it was just a really, really cold first quarter. It was one of the coldest environments, as by the weather, in the last 15 years, and it was also one of the worst flu seasons we’ve had over the last 15 years, and I think that’s a slow some spending right now.

I think the half part of my two and a half is that it’s showing the soft data, that people might be a little pessimistic. That if they think some type of recession is coming, they do less spending at the opportunity cost of savings, and they might just be saving a little bit more. So that could obviously propel the economy into a longer bull market than what we’ve always been accustomed to. It’s like what we said from 2011 to 2020, is that was the most hated bull market of all time. Well, maybe we have another one of those. We just entered the third year of a bull market, and that whenever that bull market hits its third birthday, the minimum duration of that bull market’s five years. The average duration is close to eight years. Though the third year does tend to be the most difficult because you have a slowing of market performance because it did so well in the first and second year.

But at the end of the day, you’re right, Derek, we’re going to see what a lot of these companies stay during Q1. It’s probably not going to be much, because a lot of them put their guidance out for 2025, last quarter. And given the ever changing dynamic for headlines, why would you change your annual 2025 guidance just based off of one quarter? So I don’t think there’s going to be a whole lot of tangible changes out there in the market. You might get some different guidance on market commentary of what they’re seeing that can maybe move the market, but I don’t see really anything Earth-shattering at the end of the day. Because like I said, my comments are macro news can seem overwhelming, just remember, it’s still all about stocks. It’s always going to be about stocks, which are about underlying businesses right now. And I wouldn’t bet against the US consumer or US corporations.

Derek

I see we’ve got some more questions coming in, we’ll try try to fire through them with respect to time. But one of the questions that came in makes a ton of sense, and JL, you talked about it with the spinach and the candy. But we could have an environment where in a month, we open our eyes, and all of a sudden, you’ve got a FED cutting and tax cuts and deregulation, and all the other things, and all the tariff stuff is already digested into the markets. We just have this day, this April 2nd, that everybody’s obsessed over. The question that came in that I think makes sense, and kind of ties into that, is “Any comments on the likelihood, or not, of a consolidated FED government budget-slash-tax bill being passed before mid-year? And if not, potential impacts?”

John Luke

I think that there is definitely a high likelihood of substantial legislation passed by the end of the year. There is many moving parts, and obviously, the majority, from a DC perspective, doesn’t favor Republicans drastically. It’s just a small majority, and so I think there’ll be some give and take to get that passed. But I do think that Trump’s got a timeline. He’s got midterms coming up that he’s working against, and if he’s going to try to do, or like Scott Bessent said, with the potential for a detox, it has to happen quick, and then there has to be actionable items behind it, to kind of make up for some of the issues that it solves, or issues that it caused. So I think the short-term answer is that I would not be surprised if we get something passed. And just like your commentary to start that, of think you could have a backdrop of many favorable things hitting, and it alleviates a lot of the consumer sentiment, and maybe it shifts more positive, and that could really be a strong backdrop for really all assets classes.

Derek

So… Go ahead, Dave.

David

Yeah. As we’re cutting up on time right now, we can answer a lot of these questions offline. We still have a ton of questions coming in, so thank you very much for everyone’s participation. But recognizing time, John Luke, why don’t you hit this, and Derek, I would love to hear your answer. I’ll give my answer too. But what’s maybe the biggest thing that the market’s not understanding right now throughout the rest of the year, something that might be overlooked or under-analyzed right now, that may surprise people?

John Luke

Who do you want to go first?

David

You.

John Luke

Yeah. I mean, I think you could just simply sum it up of the fatigue comment on tariffs, where I think that at some point, the market gets more or less over that being as big of an issue as it is, and focus on the kind of candy at the backdrop of it being more favorable for markets and things being digested, and actually ended up being a better, more favorable backdrop for real economic growth than what people are maybe pricing in now. I mean, just think about it, right after the election, what did all markets do? You had a pretty big favorable backdrop for risk assets, a pretty big favorable backdrop on economic growth, and a lot of good things that markets thought would come from another Trump presidency. So I just remember the four years that Trump was in, he focused on markets constantly. I don’t think that that changes, and I think I’d be hard-pressed to say that we have a dissimilar outcome this go-round than we had last.

David

Yeah. I think that Trump put and that FED put really didn’t kick in 2018, until the market was down 20%, which stocks were down like 19.9%, and they bottomed, I think it was on Christmas Eve of 2018. And we really only got halfway there. That’s a great point, John Luke. Derek, you want to go?

Derek

Well, I think I would… To my point earlier, about company results versus government macro policy, one of the comments that came in is as an investor you have to think, not feel. That was a very insightful comment from Mr. Felk. And it’s true, and we’ve been in a feeling market. There’s nothing to think about. We don’t have any idea what the policies are. Nobody has any idea what the policies are going to be. And so I think if you’re going to be optimistic, you pin it a little bit on earnings season, having some clarity to say, “Hey, these sectors, this is how they’re treating it, this is how these companies are treating it.” And you can actually start to think again, and you can do the modeling that you do as an individual stock picker.

And I just think we’ve been in this void, and it happens all the time. It happens a couple times a year, when we get in these gaps between earnings season and the next earnings season. You just go into this blackout period, where the theme of the day just can drive things way up or way down. So I’m hopeful that as we get into earnings season, at least you can start to sort out winners, losers, and have some clarity. So that would be my take.

David

I love that.

I think we all want clarity. The market definitely wants certainty, and I think that will make things much easier, because it definitely feels that there’s just more emotional volatility out there relative to market volatility, even with the market pullback of 10%. But we know with volatility breeds opportunity, and I think that you got to see the forest through the trees, try to get past some of this negative sentiment. But there’s a lot of opportunity out there.

Obviously, international markets have done really, really well. Pardon me, the S&P 500 and the Mag Seven has done pretty good. If you have a 15-stock, highly-concentrated portfolio called the Compounders in a lot of your allocations, that’s even up on the year, outperforming the S&P 500 at quarter end, by over 5%. So there’s a different look to this market than what we’ve been accustomed to over the last two years, and I think that we have to be pragmatic and evolve with this market as it continues to evolve and digest a lot of this data. So remain nimble, remain positive, and definitely keep everything in perspective, because I think that’s going to presage the best potential returns that you can have, not just over the short-term, but over the long-term.

Derek

Thanks for a full hour guys. I know we answered a bunch of the questions, which probably extended us longer than we’d normally be. I actually kind of liked the last question that came in, because it’s a fun theme, given the basketball backgrounds of the Aptus crew, who’s going to win the NCAA tournament. You kind of know where I stood, as much as I don’t love Duke, that was my pick. I’ll kind of stick there. I don’t know, where do you guys sit on this?

John Luke

I answered back Florida. I think that although you could see basically, a final type of game, again with the Florida Auburn matchup.

David

I’m wearing a blue shirt, I’m a blue blood myself, but I will never forget Christian Laettner for what he did to the UK Wildcats. So, I cannot disagree with you more. I can’t trust people that root for Duke. I don’t like people that root for Duke. I’m staying in the SEC, go Florida.

Derek

Awesome.

John Luke

Your question for me is, is does Scotty repeat at Augusta.

Derek

It’s a fun week.

John Luke

And I think he’s going to be hard to beat.

Derek

Yeah. It’s a fun week, and we will… Just, whoever’s on, we’ll have a ton of content out this week. There’s already a bunch in the works, you see what the guys have put together here on March 31st. So be on the lookout, and we appreciate you listening in. And we’re here to help. Our IC meetings, and stuff, will start with different groups this week, so if you have any questions on anything, any client questions that keep coming up, we’re here to help answer them. So appreciate your time.

John Luke

Thanks, everyone.

David

God bless y’all.

Derek

See you guys.

 

 

Disclosures

The opinions expressed during this Webinar are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.  More information about Aptus investment advisory services can be found in its Form ADV Part 2, which is available upon request. ACA-2504-2.