Aptus Quarterly Market Update: Q2 2025

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Full Transcript

Derek

Thanks for joining us. We always enjoy doing these calls and appreciate you joining us. And we do try to get in a few days before the end of the quarter just… We know how advisor schedules are. And usually in that first week or two of the quarter, you get a lot of performance reviews and just other meetings and stuff going on. Plus, we got the Fourth of July coming up the end of next week, so figured this is a good day to kind of get ahead of the curve a little bit, talk about what’s going on, what we see as catalyst over the next three, six months.

I’ll do some introductions here. You probably know from past ones here, but we’ve got JD, who’s founder of the firm and chief investment officer. We’ve got John Luke Tyner, who is our head of equities, head of fixed income. I did that last time, too. Head of fixed income. I don’t want to mix these two up. Dave Wagner, Head of Equities. Thanks for joining us. I’ll do a quick disclosure and let you guys run with it from there.

So 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 yeah, we’re going to put a couple polls up throughout this, so love for you to participate in those just to get a sense of where your heads are. But, fire away, guys.

JD

Thanks, Derek. Dave, JL, this should be good. Everybody listening and watching, we appreciate y’all being here.

The smart guys will cover kind of more relevant topics. I think everything we cover is relevant. I just kind of wanted to set the stage with if you’ve heard us at all, you know the story of our business, what we’re trying to impact is asset allocation. We think your clients care about higher compounded returns. Your clients worry about drawdown risk. So everything that we do is designed to improve asset allocation decisions. And you’ll see today, and I know you’ve heard us say this, but it is as important as it has ever been, and I think the importance is only increasing, to get it right. Because I think there are strong engines out there, and I think there are very poor engines when it comes to driving compounded returns.

So with that said, allocation is going to be the focus. How does all of this stuff impact asset allocation decisions? And obviously, we think we’re building things, strategies, portfolios, services to improve asset allocation. We think there’s incredible power in owning convexity, so negative hedges, negative carry hedges that specifically protect the extra risk that we’re taking more on the equity side of things.

And then this all ties into being better in the tails. If we can make our allocations better in the tails, more resilient in left tails and participating more heavily in right tails, then we’ve done wonders for your client’s terminal wealth. We’ve done wonders for your business. We’ve made quarterly meetings a whole lot easier. And that’s what we’re trying to do. And I think we’re getting more and more convicted in how we’re approaching that. So that’s kind of the… We’ll cover some more details about what’s happening, but I think the allocation story and the framework, better in the tails and what your clients actually want. I don’t want that to get lost in some of the weeds here. So thanks everybody for being here. Dave, JL, turn it to y’all.

David

Yeah, and I think when you say that we get more and more convicted, I actually personally think that’s an understatement. Because a lot of the talk we’ve spoken about in regards to asset allocation, to JD’s point, is that we want to do better in the tails. And this year, we’ve actually already seen almost two tails, both tails, the left tail, the drawdown from February 19th to April 8th, but also the right tail from the recent market bottom on April 8th until today. The market’s up 23%.

And if you all rewind just three months ago where our sentiment was, it was pretty negative, really, just across the board. And when we did this outlook call, this recap call, everything we spoke about was keeping things in perspective. That was kind of the moniker of the quarter. And we’re kind of doing another play on that right now. It’s one that we’ve done multiple times. And it pays more to be patient than clever.

And if you go back to the mindset of what you had back in April, I think that a lot of the returns that we’ve seen in the market, at least from a risk parity perspective, they’re simply not that bad. And when you have the right allocation in place where you can do better in the left tail, which we’ve witnessed this year, but also the right tail, you can really keep your clients invested more efficiently and actually staying invested over longer periods of time. Because if you didn’t do anything stupid back in late March or April, you probably have some pretty good returns this year. And the sentiment just really doesn’t match those returns, because I still think that sentiment is pretty negative overall.

But that’s our theme. It’s going to keep being our theme, is the necessity to focus on asset allocation, the necessity to remain patient over clever throughout any market environment. Because if you have the right structure in place, you just put yourself in such a better position to win, not just over the short term, but the long term.

And as you guys will see with John Luke, myself, JD talking, I think that this firm here at Aptus, I’m seeing over a few hundred people on this call right now. We’re just so grateful that everyone wants to listen to us. I can’t believe that some people still want to continue to listen to us, but thank you so much for everything that all of our partners do. We all know that when we take our work here very, very seriously, though we may not take ourselves seriously, and I think that’s kind of what separates us from a lot of our peers out there in the market.

But this is a recap call, so let’s recap. And as many people know, we think very thematically here at Aptus. We love painting a Bob Ross story or some type of narrative. And the narrative I’m running with here for this quarter, it’s a little obscure. I’m not going to lie. It’s based off of one of Zach Galifianakis’s first movies that he had out there in the world back in 2001 called Out Cold. And while investors may have thought that they’re out cold back in April, that’s certainly definitely not the case today.

But the movie and the premise of Out Cold was there’s basically a ski resort up in, I think it’s like Anchorage, Alaska, where it’s run by a bunch of drunks and hippie-loving ski and snowboarders. And corporate America tries to come in and take over the mountains to corporatize it for profits because they kind of try to skate where the pucks are going on vacations and the entire snow industry as a whole.

But these drunk snowboarders and hippies, they have this godfather that always say something along the lines of, “Bull Mountain, don’t go a changin’,” because that was the mountain’s name. It was Bull Mountain.

I think we could say the exact same thing for this market, but take out mountains and put in market. “Hey, bull market, don’t go a changin’.” Because what we’ve really learned this quarter is that the faster the markets fall, the faster they rebound. We had almost a 20% peak-to-trough pullback over the span of five or six weeks. And yet, right now, as of today, which is June 26th, we’re 15 basis points away from re-hitting the all-time highs from February 19th.

So hopefully we think, if we look at earnings, we look at macroeconomic data, that this bull market that we thought was gone, it ain’t going a changin’. Because if we really look at a lot of the hard data out there, that trumps any of the soft data that led to the substantial amount of negative perspective in this market that we’ve seen for the majority of the year, whether it’s from geopolitics, whether it was from Washington D.C., whether it was from tariffs. That’s the main culprit there. It just shows us that we need to remain grounded as investors, remain patient, and focus on the hard data.

That soft data, which is sentiment data, sentiment driven, it’s going to be very, very emotional, and it actually probably can create more tails in the market that we’ve seen this year because I think soft data’s only going to become even more polarizing as we look through the windshield moving forward. And you have to have the right asset allocation in place to take advantage of that.

But when I was looking at the market from an equity perspective over the past few weeks, I think there’s a few things that stick out to me. I think the first one is going to be the reemergence of the Magnificent Seven. They definitely took umbrage being called the Lag Seven of last quarter. And if you look at the queues off the recent market bottom on April 8th, they’re almost up 31% off the market bottom. In fact, year to date, they are now beating… the queue’s beating the S&P 500 by about almost 2%. So they’d actually rip roared back off of strong earnings. And back in April, I think a lot of those names in that queues index, from a valuation perspective, were very depressed. So that tells me that the market is actually focusing on economic growth.

Because in a world of tariffs, you would expect that the consumer to be hit and the consumer areas of the market to be hit. And if the market looks for some type of idiosyncratic mechanism for growth, really, the only playing pound for the moment at hand was enter stage left, the AI, tech, proxy-like names out there, your NVIDIA, your AVGO, and so on. We all know the list here.

I think the second thing that stuck out to me was that international continued to perform pretty well this quarter. I think EM actually outpaced EFA, but both of them outpace the S&P 500.

And when I talked with a lot of our MOs and the other PMs here, it’s always centered around a rule of law that you need to follow the market and what the market’s telling you. And so far this year, the market’s telling you that we’re going a little bit more risk on more internationally. Donald Trump is making international grade again. Because international not just outperformed, during the periods of volatility, the left tail event, given their depressed valuations, but actually reemerging out of the trough of the market. You actually have international performing pretty well in line with the S&P 500 as a whole, and you actually have EM outperforming the S&P 500 off of the market bottom. So that’s kind of the market telling you, “Hey, you know what? Maybe we need to look at international a little bit.”

Personally, the house view of Aptus is that we need to be cognizant of our international weight, but it’s likely going to be a structural underweight over longer periods of time. And we can get into that later.

But moving forward from an equity perspective, it feels like it’s going to be a summer of macro for us. There’s a lot of macro issues at hand, such as the One Big Beautiful Bill, the runoff of the 90-day delay of the tariffs on July 9th, the debt ceiling coming due here very shortly, obviously, some tariffs, inbound tariff revenue. I think we’re running about $60 billion greater than where we were at this point last year. It’s kind of kicking can down the road by a few weeks right now.

But instead of the summer of George from Seinfeld, it’s going to be the summer of macro moving forward. And you can throw in a pretty big earning season there, too. So I think as investors, it just pays to be nimble, to navigate that this market that might see some chop in the future. That chop could be good, as in a right tail, but also could be in a left tail on the downside. So we brought up a poll question.

Derek

Time for a poll. I threw a poll out there, given your macro discussion. So feel free to hop in. I’m curious to see where people think the summer of Georgia is heading.

David

Yeah. So participants, where do you see the market being most focused on in the weeks ahead? In a Fed mistake, tariffs, geopolitics with Iran-Israel, the labor market earnings or inflation?

Derek, I can’t see any of the results on the screen. I don’t know if you, the host, has the ability to see that to kind of give the results.

Derek

Geopolitics is a pretty clear winner, Fed mistake a little bit behind it, tariffs a little bit behind that. Not much focus on earnings and inflation and labor markets, so…

David

Wow. That actually-

John Luke

Interesting.

David

… surprised me. But I mean, that’s one of the cool things about Aptus, is Aptus is basically almost worldwide right now that we just get so many different thoughts and opinions from around the country.

Personally, John Luke, I’d look, I’d like to hear your answer, JD’s answer here, too. I would’ve put my eggs in the basket of earnings. That’s probably my focal point.

John Luke

Yeah, I think mine would be Fed mistake. You’re getting a lot of push the last couple of weeks from different parts of the Trump administration and different Fed governors coming with thoughts that are counter to what Chairman Powell’s been saying. So I think that’s a big focus.

JD

I would say none of it matters. If the train rolls on, equities go higher. You better own enough of them. That’s what I would say.

Derek

I would say I would’ve been right on all three of my guesses for you three.

David

We stayed on brand, didn’t we?

Derek

Yeah. Perfect.

John Luke

We did. We did.

JD

Cool.

David

I’ll pass it off to John Luke to give a recap on the fixed income market.

John Luke

Perfect. Well, it’s always hard to follow Dave. The Rolodex of themes that goes through that boy’s mind is hard to fathom, so nice job, again, Dave, for-

David

You don’t want to live in my mind.

John Luke

Haven’t seen that movie, but it’s a great comparison. So yeah, I think just to kick it off on the fixed income side, obviously, it’s been a little quieter from a bond perspective than it has on the equity side of the equation. Year to date, bonds have performed reasonably well just given that elevated nominal rates have been a good income source for fixed income and rates are marginally lower than where we were to start the year. So I don’t think anyone’s too disappointed with seeing the bond market up. A little shy of the S&P year to date. I guess that’s creeping further and further apart as we get closer to making highs.But still, overall, not bad.

And when you look at it from the credit perspective, you continue to see resilience in credit markets and credit spreads, which I think just shows the strength of the economy at large and where market participants are concerned. And it’s obviously not too centralized around credit. It did widen out a bit with the Liberation Day kind of scare we saw in late March and early April, but spreads have quickly normalized back and we’re near those all-time highs again, or all-time tights and spreads that we’d seen.

I think one of the notables that this chart illustrates here on the right side has been just how rates have moved in response to the Fed’s cut last year. And typically, cuts are associated with lower yields, but it’s been quite the counter this time.

And I think you can kind of put it in two perspectives. Rates are higher now than where they were when we cut, especially in the intermediate and longer term part of the curve. I think that you saw rates actually moving lower before the Fed cut. And I think some of the strength in yields that we’ve seen has been because the Fed was proactive in those cuts last year. Where rates were getting restrictive, we saw last summer inflation slowed down pretty incrementally. And so that backdrop, I think, continues to pressure yield.

But given the active role that we’ve seen politicians, both elected and non, take from a fiscal perspective on the economy, everything shifted to more of a more populous type of agenda, which really is ways that they’ve used that policy to interject into different market environments. Just think about post-COVID and the fiscal response that we’ve seen.

And so rates moving forward are probably not going to go back to the post-financial crisis norms of what we saw where real rates were very negative. Rates in general were low. And so as we continue to see inflation stay more volatile, a more active response to different economic regimes, and then, of course, just the fiscal deficit that we’re running at full employment, I think that the belief that we go back to any type of zERT policy just is pretty unfounded. And I think that you’ll continue to see pressure on the longer end of the curve.

Dave teed up several of the key reasons, the debt ceiling, the amount of debt rolling off, the supply issues, and then mainly just being that bonds have continued to be a pretty poor hedge to stocks in general. And so with that being said, the term premium, that’s kind of required for folks to allocate to bonds. Just given that they don’t have that engine, like JD alluded to, means that we’re probably going to continue to see yields push higher, even if the Fed does continue cutting, which I’ll kind of get into here next.

There one more after this, Dave? I kind of got ahead of this, but basically just we’ve seen spreads really turn back tighter. So I think before I get into a little bit of the Fed talk, wanted to throw this one up. Where do you see the 10-year yield by the end of 2026? I probably gave you my opinions. But three and a half or lower, four to four and a half or five or higher? JD, what do you think?

JD

I don’t know. I don’t know. I think the Fed’s going to cut. What I’ve said a million times, though, is what happens if the Fed cuts and rates go up? Just kind of like what you’re saying. But I think we’re due for a cut, and I do think the markets will like that.

John Luke

Yeah. So four to four and a half kind of status quo with where we’re at now. And I think that just, obviously, the Fed had their meeting last week. They didn’t cut rates. You’ve gotten a bunch more vocal critics, as I kind of alluded to a few minutes ago, from different folks inside the Fed, specifically Chris Waller, which happens to be on the shortlist for Federal Reserve chair next year, which maybe is part of that, maybe not. Who knows?

But you’re in a backdrop where inflation has certainly decreased drastically. We’re at basically four-year lows on inflation. You’ve got the shelter component of inflation working lower, which was a lagging indicator, keeping inflation elevated for quite a while. So it’s about 40% of the inflation index that the Fed’s tracking. It’s at 3.9% year-over-year growth on the shelter side, but it’s moving lower.

And core PCE is at 2.5%, but the Fed actually has written up their estimate for where it will end the year to 3.1%. So they’re expecting a pretty large jump from the inflation card, maybe due to tariffs, as we go into the back of the year. And just keep in mind that the last 50 years, inflation’s averaged 3.6%. And so we’re at 2.5. The Fed thinks that we’ll end the year at 3.1.

Tariffs arguably are a one-time jump in prices, and I don’t think that they should be a huge driver of Fed policy and rate policy moving forward. And so I think that while the market wants cuts, Chairman Powell has been a little bit hawkish in some of his commentary, I think that it’s highly likely that that will get cut sooner rather than later. And if you look, September’s pricing almost a full cut with a lot of commentary here pushing towards potential cuts as soon as July if the inflation data stays tame.

So I think the counter to that is maybe the backdrop of the fact that we have low comps from last year on the inflation front. And so I think from a year-over-year perspective, as low comps roll off and get replaced with new numbers, it could pressure some of the rates higher. So that’s certainly something that will be high in the mix.

And then I think, really, the second-biggest factor, barring some of the economic data from the labor market specifically, as well as do we actually see any impacts from tariffs, is going to be focused on the Fed chair and who’s going to take the position. So you’ve got really four key folks kind of at the top part of the list. You’ve got the Warsh, you’ve got Hassett, you’ve got Scott Bessent, and one more. Dave?

David

Chris Waller.

John Luke

That I just said.

David

Waller. Yeah.

John Luke

And so I think that all of these guys are going to kind of be lobbying for it, but the important part is Trump and Powell obviously aren’t on the same page with where they think policies should go. And if Trump were to go out and go ahead and nominate one of these other folks for the job, it could kind of make the lame duck of Powell as his term ends in early 2026, like make the lame duck even lamer.

And so I think that you’re going to continue to get some pressure from the administration on… President Trump has renamed Jerome too-late Powell. And the risk here is that if Jerome keeps waiting and waiting and waiting, that we could see some bad outcomes happen where you get a crack in the labor market and he’s late to the party to cut. And we’ll kind of get into that in the good, bad, and the ugly case. So that kind rounds up where our heads are.

David

I mean, John Luke, that’s kind of what the dot plots are saying right now. If you look at the dot plots in 2026, it’s basically saying, what, like two 250 base point, that’s the 1% on the year if I’m reading the chart correctly. That’s way in the market right there. Part of the market’s saying that. I apologize. That’s what the market’s saying, not the dot plots. And that’s, in a way, the market telling you that it’s expecting some type of Fed policy error to occur, that they are going to be late to the party. That’s what the [inaudible 00:24:35] was getting priced in right now. And that probably has to do with my opinion, agreed with you, John Luke, all due to labor right now. Because when labor falls off, it happens fast, and it happens quick, and that’s when the Fed needs to act quick.

John Luke

Yeah. Then you’ve got US policy at a pretty large differential to European policy, for instance, which is at 2%. So we’re a bit of an outlier on that front. And we heard this in Trump 1.0 where he was dogging the Europeans the whole time for holding rates at zero while ours large were much higher. And so I think that a lot of that comparison, whether it’s right or wrong, continues.

David

And this is a question for another day, John Luke. When you look at just where interest rates are here domestically versus internationally, it’s kind of funny to look at what the dollar’s been doing. I’m guessing that at the end of this call we’ll probably get a question on the dollar, so we’ll probably keep that conversation for then, but it’s acting very differently than what we would expect.

John Luke

Agree.

David

So keeping on just some macro focus here, let’s talk earnings and then we’ll talk about the deficit next. And at the end of the day, we always talk about anything that happens in Washington D.C. Is likely going to be noise. There’s a chart that we show all the time, I think I have it in here, and it’s here on the right depicting Trump 1.0’s return by sectors within the S&P 500 and then within Obama’s eight years the sector performance. And what you’ll recognize is that certain sectors performed really well under both presidencies, but also the worst sectors were synonymous across those presidencies, showing you that you couldn’t get more polar opposite guys with Donald and Barack, and yet performance is still, you know what, pretty similar during their tenure in Washington, D.C.

So what we need to do is investors is block out a lot of that noise in Washington D.C., and focus on earnings. Because at the end of the day, earnings is going to absolutely drive every single thing that is going to presage future returns for the S&P 500 or whatever respective benchmark that you’re going to be looking at.

And I think that’s one of the largest, most highest contributory reasons why the S&P 500 was able to bounce back almost 9% during the quarter, was because we had, in financial technical terminology, [inaudible 00:27:05] good earnings. Heading into earnings season, the market was only expecting earnings per share to grow by 8%. Well, you know what, it came in at 14%. And that’s following the quarter, what we saw during Q4, when expectations were for the market to grow earnings at 12%, and they came in at 16%.

So earnings are very, very strong right now and something that myself, John Luke, JD, Brad, Beckham and the rest of the team has been talking about is that we might not see that earnings degradation that we’ve been accustomed to during recessionary periods. During recessionary periods, historically speaking, on meeting earnings per share have declined about 20%. On average, it’s closer to 28%.

But when you have this AI narrative, this AI theme, and all the constituents and players, let’s just call it the Mag Seven, kick out Tesla, put Broadcom in, it equates to about 32% of the index.

And the CapEx spend going into artificial intelligence is absolutely not slowing whatsoever. If you look at the CapEx expectations out of those companies for this year, it’s about 15% higher than the expectations were back at the end of last year. So that just shows the ratcheting up of CapEx that’s continuing to happen from these companies. And that just means that one person’s CapEx is another person’s revenue. And when those constituents, those seven constituents account for 32% of benchmark, that’s a pretty good cornerstone to earnings that they might not be as bad as expected.

And that’s been a theme and overall narrative for Aptus as a whole, is that this operating leverage is now a core tenant of the S&P 500, that when revenues are strong, earnings are going to be even better and vice versa. If revenues come down, earnings per share are going to be pretty bad. Operating leverage can cut both ways.But when operating leverage is working for you, it’s awesome for market returns. And that’s what we’ve continued to see over the last two and a half years or so, is operating leverage is working for the largest of the large companies. And that’s what gave us these results of 14% earnings growth on a year-over-year basis to this past quarter.

I would say this earnings season was definitely a headache for myself and Brad as we listened to 50 earnings calls. A few things that stuck out to us, though, is probably the Visa CEO saying that, “Hey, you know what? Spending in the first quarter ending in March was very strong. But you know what? We’re in late April right now, early May, and the continuation of spending has only gotten better in the face of tariffs because…” You know, this earnings called happened after Liberation Day. And it just shows you that the consumer is still very healthy, the consumer is very strong, and that’s driving the other subset of earnings.

On one side, you have the AI CapEx, and the other side you have really strong consumer spending aspect. And that’s the chart on the bottom right, that the consumer’s spending on a year-over-year average of 5.4%, which is at the top end of its historical range. That just shows you the lesson, these two lessons, during periods of volatility. Focus on earnings and the trajectory of earnings. And that’s what the middle chart is showing you here.

But also, focus on the hard data, not the soft data. The soft data’s going to be even more volatile than the market. Let’s look at the hard data because that’s not survey data, it’s tangible data of actually what’s coming in. And if I were to look at all the hard data right now. It’s really tough to find a black eye amongst any hard data report out there. Maybe a little bit on the ISM manufacturing, but everything else looks pretty strong right now.

So moving forward, I really want to focus on Q2 earnings, of course, because you get more of a clearer picture on the tariff situation and consumer spending habits. But right now, the market’s pricing in earnings growth for the S&P 500 this quarter on a year-over-year basis closer to 11%, which is still above its historical average of closer to 9%.

I would say those estimates have partly come down a little bit, which is just a natural progression after two really strong earnings reports, but it’s still very, very good. And it equates to about a 10% earnings growth for 2025 over 2024. So it’s going to be another fun, awesome… We’re going to have a lot of tails in these earnings reports, I think, coming up from a sentiment perspective. It’s going to be really, really fun with a right tail, but also a left tail. It’s going to be pretty much a headache for Brad and I trying to decipher and read through large-cap earnings reports and small-cap earnings reports, but that’s absolutely what we live for. But overall, earnings remain very, very good.

John Luke

And I think just my comment on that, too, Dave, would be the earnings resilience of US versus other segments of the market is obviously… The consistency is key. But also, as some of the deregulation impacts, the AI productivity impacts work their way through markets, and potentially if we see the Fed cut rates 50 bits or whatever they’re going to do this year, that continues to support multiple… Kind of hard to poke too big of a hole in it as long as we keep the status quo rolling.

David

John Luke, talking about that, look at international valuation, their respective growth. Then compare it to small-caps current valuation and their respective growth. Both are trading about a 30% discount to the S&P 500. You’re getting more consistency and better growth out of the small-cap land. Like gun to head, I still want small-caps in that accord right there. I just want to be tied as domestically as I possibly can.

John Luke

Yep. All right. This has been a on-repeat commentary that we’ve made. There obviously is a debt problem. How it gets addressed is a moving target in a sense. But when you have debt problems, historically, we’ve seen many times through different civilizations, through different economies, from different countries… And there’s a couple key ways that you can kind of eliminate or get rid of the debt problem.

The austerity option, or maybe increasing taxes or cutting spending, we’ve gotten a pretty good slap in the face the last several weeks on the impacts of DOGE just not being… While being something, they’re not enough whenever that you’re running $2 trillion deficits to make a huge difference.

Growing out of the debt problem is another key way. And that’s kind of the magic elixir that you really hope for a productivity miracle, some kind of energy revolution where you see the economy at large in real terms grow out of the debt.

And then the third that happens very consistently is that you inflate your way out of the debt problem. And that goes back… We’ve got a slide that we’ve talked about so many times on recent meetings just showing purchasing power and putting a number to it over the last 50 years. A million dollars of purchasing power in the 1970s, to have the equivalent purchasing power today, you need seven and a half million dollars. I’ve had an 86% debasement of your dollar over the past 50 years. It’s just kind of full stop there. Your money is being debased, and you got to own things that can help you protect against that.

And when you look at the debt problem and you dig into the details of the numbers, that’s where it’s a bit more alarming because you can break down the budget into discretionary items or to non-discretionary items. Discretionary is obviously things that you can touch and impact, but that only makes up about 29% of the budget and the spend. The rest on the non-discretionary side at 71% of the budget are things that are untouchable. That’s net interest, that’s social security, and that’s healthcare. And those items are politically untouchable as we’ve learned from many years of watching politics in D.C.

And so the backdrop from here is… And you got it from Scott Bessent, you got it from Elon, his takeaway on the DOGE side was we’ve got to grow the economy faster than the debt growth. And how do you do that? Well, you have this sneaky debasement, sneaky inflation that continues to eat away at purchasing power and make the dollars that you’re paying back the debt with worth less and less and less so that you can actually pay off the debt at some point or pay it down to reasonable levels.

So while it’s scary when you look at it from a high level, it’s historically happened many times. And I think it’s just critical. It makes it as critical as ever to have asset allocations that can combat this issue.

JD

I think a couple… Derek, I don’t know if you want to pull any other polls up, but I think a couple things to make is… a couple points to make, one would be, like the JL’s point, the austerity piece through taxation or spending, neither one of those is happening. And so being able to debase wealth through the system that is in play now and will continue to be in play, it’s a much easier way to kind of get things right without saying, “Hey, here’s a whopping new tax increase,” or, “We’re”… Because the government’s such a huge part at this point. The government spend is such a huge part of the economy. To disrupt that is a major, major issue.

So what I would stress, and bringing us to a close, is we talk about tails all the time. And we talk about being better in the tails because we talk about not frequency of returns, we talk about impact of returns. And so the bell curve that we always point to, stats 101, is there’s tons of frequency within the tails. That’s where most of the returns happen. But it’s how do your portfolios position in a right tail and how do they perform in a left tail that really actually impact the compounded return, again, which is all that matters.

I’ll tell you my being kind of taking the gloves off a little bit. I’ve said 7,000 on the spot, and I haven’t changed. Even at April lows, 7,000 on the spot. And the reason for that is because DOGE was just a whole bunch of theater. Deficit increased since that. They’re going to continue to. Look at the projections of our debt. It has to continue. If it doesn’t continue, the world sets on fire. It has to continue. No politician is going to let the world catch on fire and not put it out immediately. If you thought the COVID package was big, if we have a disruption in the economy, wait till you see what happens next. What that means is dollars will be supplied to the system en masse, which means you better own risk assets.

So a different way of saying this, then I’ll shut up. But a different way of saying this is the typical way of portfolio construction today is, “Hey, John Luke’s more aggressive. He’s more stocks, less bonds. Dave’s more conservative. He’s more bonds, less stocks.” That’s completely broken, in our opinion.

Now, to let y’all in on a secret, we have to operate in this Vanguard and BlackRock world for the portfolios and the solutions we’re building because we can’t be that different, but we’re starting to be less and less politically correct when it comes to that if we truly believe fixed income is going to be a problem, which it is.

So think about this. If you own… This is kind of the benefits of what we’re doing and what we’re saying. If we are convicted that you have to own more risk assets and less bonds, and we can show the dollar purchasing power and everything else, that’s what’s happening. I have a comment on that. But if we’re right, if we’re right and equities continue to rip, our allocation wins because we own more of the risk asset, less of the “conservative” asset. If we’re wrong and there is left tail is the next coming tail, that’s where the convexity pops in. And so it’s like it gives you this, “Hey”…

Because I still think that, hey, if we were more productive than we think, if growth is better than we think, if we deflate our way… or inflate our way out of this a little bit like, what happens? Risk assets go higher. If the economy falls apart and everything starts to catch on fire, the Fed comes in with incredible amounts of US dollars. And guess what? Risk assets end up going higher.

And so the bag holders are the bondholders, and that’s kind of what we want your end clients to not be. And we want to give you the freedom and the conviction and the confidence that shifting allocations is going to impact, but you don’t have to be as concerned about drawdown risk as the efficient market or NPT would tell you to be. Through the ownership of options and the ownership of hedges and that convexity, that’s why Aptus exists.

So I guess that’s kind of how I would wrap it, is a lot of the things… So we always steal Lyn Alden’s comment that there’s no stopping this train. That’s kind of where we sit, is there’s a lot of noise, tariffs… We didn’t get into all of that, which we can if you’ve got questions offline. I think the importance that I would stress, and I know I already have, but asset allocation has never been more important. It’s always been the important thing. It’s never been more important because you’ve got this massive discrepancy in potential returns for the different classes of assets, which is simply stocks, bonds, or cash.

So with that said, Derek, I don’t know how you want to wrap us, but we really do appreciate… Looks like we got a great turnout, and we appreciate everybody being here. Actually, thank you, Derek, for popping this.

So obviously we have a suite of funds and a suite of models and things like that. I think this is a really powerful slide. And hats off to Dave and Brian for thinking this up. But it shows the different ways that we’re trying to innovate and create strategies that express the message that we have. And so you’ve got right tail focus funds. You’ve got left tail focus funds. You’ve got the things in between. And then there’s really interesting stuff happening within DEFR we just launched, the changes being made in JUICY DUBS and IDUB. Please ask us offline. But I think we were really trying to push the envelope to the absolute best derivative exposure in a 40 ZAC fund that helps us express asset allocation conviction.

So not even going to get into funds specifically, but we wanted to show… I think this is a great slide that kind of show where each fund lives in terms of ability to help impact allocation.

Derek

Yeah. And I would say… It’s funny. We threw the poll out there about the tail. I mean, I think that just reinforces the fact that the hardest part, I think, that advisor set for clients is most intuitively know that stocks are going to be the way to be long-term, better CAGRs. Most people in here seem to believe that the next tail is going to be to the upside. The challenge is always, how do I get them comfortable through the challenges they’re going to come? And Dave has talked a lot about how we’re going to have more tails. That’s just the way it’s going to be because of the backdrop.

So I think that part is all helpful. I think we got a decent number of questions, but I really don’t want to tie everybody up all day. It’s a Sunday. It’s a summer Thursday, and I’d rather just take them all offline. But we do have names of who ask certain questions, and so we’ll just hit you. We’ll hit you offline. We appreciate everybody kind of chiming in on that stuff.

John Luke

We’ll have the deck available with the webinar link, right, Derek?

Derek

Yeah. We’ll send everything out. We’re coming up. So it’s the 26th. So yeah. I mean, end of the month is Monday. End of the quarter is Monday. So Dave in particular gets… Hats off to him for the way he just cranks through end-of-the-quarter stuff and has stuff published within hours of the quarter end. So we’ll share all this stuff as soon as we can. And I mean, we appreciate everybody for the relationships and-

David

Day one, look for the presentation deck, the newsletter, and this webcast. It’s a quarterly investment toolkit that we put out there day one every year to beat some of our peers.

John Luke

And Dave has another webinar tomorrow on the stocks leads, anyone wants to tune into that.

Derek

Awesome. Thanks, guys. We hit right on the 45-minute mark. Nice. Well done.

JD

Nice. Thanks, everybody.

David

God bless.

 

 

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