Aptus Quarterly Market Update: Q3 2025

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Full Transcript

Derek

Welcome. Welcome. No closing bell in the background, but we just want to start right on time before we get into the evening hours. Dave is, I think, going to hit a Monday Night Football game tonight and JL’s still smarting from the Ryder Cup weekend, so we got the crew here today. Thanks for coming on, guys.

John Luke

Yeah, thank you. Always a fun time, right before a quarter ends, in line with the norm. It’s been a fun quarter. Yeah, I’ll kick it off. First off, just as a start to the call, we always like to thank our partners for the trust and confidence that they put in us. We wouldn’t be here without you. We appreciate you taking your time to tune in and read through the lofty amount of material that mostly Dave puts out to end the quarter, so appreciate that. Always here to help if there’s any questions. But in light of the Ryder Cup, which was really painful up until yesterday, and then it looked somewhat promising, and then there was a flip at the end. But I think one of the fun stats, and obviously I’m a golf nerd when it comes to thinking about these things, and of course a big fan, and was pulling hard for the USA yesterday.

But a crazy stat that happened for the Europeans that really dictated the success, and I think it can loop together with constructing portfolios at least, maybe some way I tried to justify that in my head. But if you looked at the math of the Europeans, their ball striking compared to the US. The US pretty much dominated them. And that was even with a lot of bad wedge shots if you watched at the end. But if you looked at the putting stats, which we all know the saying, at least anyone that’s a golfer, “You drive for the show, you putt for the dough.” The Europeans led the US by eight and a half strokes on the greens. And so said another way, the US lost eight and a half strokes on the greens to the Europeans. And when you put that in context to constructing portfolios and thinking about security selection and asset allocation that we talk a lot about, yeah, hitting it great off the tee and hitting a nice approach shot into the green is sexy, just like the security selection part of building portfolios.

But when it comes down to getting the ball in the hole, putting for the dough, the asset allocation really dictates the long-term success. And you can round it up as the Americans maybe played better than the Europeans, but they didn’t get it the hole fast enough, and a little too late to come and push forward. So a silly analogy, but thought it was fun, wanted to try to soften the blow of a difficult Ryder Cup.

JD

JL teased us with the Ryder Cup analogy. That wasn’t a stretch, that was solid. That was solid.

David

I love it.

Derek

Well, I’m going to-

John Luke

I’m not the creative one, so I’ll leave that to Dave for next time, but I thought that was fun. It definitely made some truth to that saying.

David

I still need a theme for the newsletter this quarter, John Luke, so I might be giving you a call tonight for some ideas. You’re on fire, man.

Derek

Well, we got a pretty good crew and I want to get out of the way and just get the disclosure stuff and then hand it over to John Luke, head of fixed income, Dave, head of equities, JD, founder and chief investment officer. If this is your first time, we’ve been doing these every quarter. We try to do it before the quarter ends a little bit before the quarter ends, not too early, but enough before everybody gets into their meetings. And just to prepare, look back a little bit on what’s been going on and look ahead towards what some of the key talking points might be. Maybe help prep for client meetings if you’re doing them on a quarterly basis. So we’ll run through some of the stuff that’s happened, some of the stuff that we’re hearing that clients have been asking about.

First, I’ll read a disclosure. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee, and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus’ investment advisory services can be found in its form ADV part two, which is available upon request. So take it over, guys.

David

Let’s have a time, here. All right? The Europeans may beat us on the golf course in this year’s Ryder Cup, but they did not beat us in the quarterly returns here as measured by the MSCI EAFE, and I love to see it. Absolutely love to see it. EM, on the other side actually had a pretty good quarter for us really outperforming the S&P 500, but really bringing everything in together on the equity side of the ledger before we get to John Luke’s smart putt for dough bond side of the ledger. It was a pretty weird quarter. I would say from a thousand-foot level, a lot of people probably thought that it was a rising tide lifts all boats. Well, that couldn’t be further from the truth. Even when you delve underneath the hood of all of the returns here, not just the S&P 500, there’s some dichotomies and some weirdness going on.

So the first one that I would probably recognize that I personally thought was really weird was that when small caps outperform large caps, which is what we saw during this quarter, small caps had a return of 12% while large caps as measured by the S&P 500 only returned about seven and a half percent. You tend to see the average stock called basically, let’s just call it the S&P 493 outperforming. Well, if you see here on this table down at the bottom side, the average stock, which is the RSP ticker, was only up 4%. And that’s something that really stood out to me, because again, like I just mentioned, when small beats large, the average stock tends to also do very well versus large caps. But there was kind of a tale of two cities on what worked. First large caps worked specifically on the cap weighted benchmark because of the continued boom in spending on the CapEx cycle within artificial intelligence, definitely helping the Mag 7 X Tesla.

By now I think we all would agree that we could probably take Tesla out of the Mag 7 and throw Broadcom on in there with Hock Tan and what he’s been doing over there with the ASIC chips. But let’s just say broad-based mega caps, they continue to perform very well off of strong fundamentals, so strong revenue growth, strong earnings growth.

Well, on the small caps, small caps did not really outperform because of great fundamentals that we saw in the large cap land. They really just saw re-rating higher in their valuation off of the expectation of increased fed cuts, not just through the rest of this year but into 2026. And myself, Brad who are obviously very much ingrained in the small cap space, we tend to see a lot of times that the small cap earnings are highly sensitive to interest rates because of their debt load.

If you aggregate all the balance sheets within small cap land, about 70% of the debt is floating rate, and it tends to be shorter in duration. The weighted average coupon for small caps tend to be about 7.2%, while for large caps it’s somewhere in the 4% range. So given the fact that while their market rates came down substantially, it was more the expectation that rates would come down in the future alongside some fed cuts, really gave some exuberance on the small cap side of things. So that’s kind of what worked, mega caps and small caps.

But as we’ve hit, I think maybe the number’s 28 new all time so far year to date, everyone’s kind of questioning this rally. They might not be questioning the rally. That probably isn’t the best terminology. They’re probably thinking about looking through the windshield, “Where can we go from here?” Because the S&P 500’s up almost 34, 35% off the tariff bottom back on April 8th. In fact, I think we had the fourth-best five month run in equity markets ever. So everyone assumed that future returns, obviously it can’t be to the extent of 34% over five months, but I would expect some tepidness in returns in September, well, which is basically done, but also October, just due to seasonality.

Well, this month, I mean the S&P 500 is up 3% in September, really kind of bucking that trend. But this table on the top right-hand side talks about, “We’ve had one of the best rallies, five-month rallies ever. What does that mean to future returns?” And if you look over the next one in three months, returns are still pretty good, it’s pretty good hit rate. But once you get six months later down the road or a full year down the road, stocks tend to be higher a hundred percent of the time. Over the next six months they tend to be up about four and a half percent. And over the next 12 months they’re up about 9%, so in line with historical averages.

So if anyone listened to our call last quarter or really any of our presentations over the last three months, we’ve done a lot of studies saying, “The best time to actually invest in the stock market from an equity perspective is at all-time highs, that all-time highs tend to get more all-time highs into the future. But not only that, they tend to have a pretty good Sharpe ratio. They tend to have a better than average return over the next 12 months with a lower standard deviation. So a pretty good time to be invested.” So even though times are really, really, really good right now, I think there’s still a lot of reasons to be optimistic in this market.

But continuing on this rational, optimistic theme, I think one of the questions I probably get the most right now is can this CapEx boom, this CapEx cycle continue in the AI narrative, especially with quantum computing looking five, 10 years down the road, given the chip cycle is probably now a one or two year chip cycle instead of three years, what it’s historically been, can this continue?

And whether you look at it from a growth standpoint or a valuation standpoint, we’re nowhere near the bubble that we saw back in September of 2021, or even more so the famous dot-com bubble of the late 1990s and early 2000s. And I think that this table on the top left-hand side, it really talks about the contribution to total return within our yield plus growth framework here at Aptus for the NASDAQ. And it shows that majority of returns have actually been contributed from earnings and not really valuation expansion to contraction.

That tells me, “Hey, this is still a pretty healthy market even though that there’s a lot of concentration in earnings growth specifically around the NVIDIA and like-minded individual stocks, where I’m not too worried.” But I think the biggest thing that really stuck out to me was underneath the hood from a factor perspective, really since this April 8th low off the tariff tension that we saw, high beta, which is kind of a proxy for low quality stocks, has absolutely kicked butt specifically relative to higher quality stocks, which could also be a proxy for low vol stocks. Since the April 8th, bottom high beta is beating low beta by 55%. And if you go back to the COVID bottom of March 23rd, 2020, and you followed that in the initial five months of that recovery before the market saw its first 5% pullback in September, 2020, you didn’t get that variance between high beta and low beta.

So hopefully this market starts to see some type of rationality out there in the market by rewarding great fundamental companies because if you were a Mag 7 or basically a tech stock that did not have profitable earnings, you had a pretty tough year. And that’s why this chart on the bottom right-hand side talks about the percentage of stocks outperforming the S&P 500 over the last few month intervals. And really the last five months, only 27% of stocks outperformed the benchmark of the S&P 500. So to tie everything together, it has not been a rising tide lifts all boats type of overall environment for the stock market. It’s definitely been a lot of dispersion out in the market. Dispersion basically means that there’s a lot of variance between like-minded stocks that tend to be historically highly correlated. So it’s been a tough environment. But again, everything we talked to and that’s why I love John Luke’s analogy, “You drive for show, putt for dough,” it all comes back to asset allocation.

And when you do that, when you think about it from that side and try to own as much data as possible, you didn’t have to go out there and be right because it’s very difficult to be right on the active management style of picking stocks, which John Luke would probably attribute to very much being like driving the ball 300 yards down the fairway. It’s not going to win any matches, but it looks hella cool and hella fun. But again, putting is where you make your money, just like the asset allocation. And that’s what we try to do here at Aptus. Let’s have as much data as we possibly can.

JD

Yeah. And I would add, just thinking about your comment earlier, Dave, and I know you can find a million articles to read about how overvalued equities are now, and if asset allocation is kind of the king decision you can make, what drives that is kind of the fiscal backdrop that we have and just the overall, like, “What’s done really well?” Stocks have done well, gold has done well, Bitcoin has done well. I think the recurring theme that we are so convicted will not change is cheap money will continue to pour into the system because of the way it’s structured. And that should lead. Sure, we could see a 20% pullback like we saw earlier this year because of the whole tariff discussion. But the long-term, especially if you’ve got clients with long-term wealth, their asset allocation should reflect the backdrop that we’re in, which is the only place for risk assets is to go higher. Sure, protect left tails, but that’s where they’re going.

Our opinion is that’s where they’re going and that’s where we’re just trying to build portfolios. And we have all the data to talk through what Dave and JL do to talk through all the things. But the biggest, the most important thing is how you allocate your dollars between, “Safe assets and risk assets.” And in this backdrop, I think you could really, really hurt long-term compounded returns by being safe. And I say safe with quotations.

John Luke

Yeah. I mean, that-

David

JD often points out that right tails happen just as much, or actually more often than left tails. We all know the bad math of draw-downs, where you got to protect on the left-hand side. But the table that I have pulled up, and it’s something that we’ve continued to talk about in a lot of our beads, tails are just going to occur a ton more often. I mean this chart shows you that since 1942, the market has seen one 20% pullback every five and a half years. Well JD, we know we’re five and a half years into this decade. And if I ask you, JD, how many 20% pullbacks have we seen in this decade, your answer would be three. So we’re starting to see this play out in real times, not just on the left tail but also on the right tail, because we’re in the right tail-

JD

Yeah, and-

David

… right now in my opinion.

JD

Yeah. And we talk a good bit about, I don’t think we talk enough about this point. We talk a good bit about all the stuff around it. But your one objective as an advisor, and I know that I’ve said this a million times, but the one thing that I can tell you is higher CAGRs make all financial plans look better. I think that’s a really hard thing to argue with. There’s no client that says, “Actually I want to lower compounded return. Whatever you decide to do, JL or Dave, give me a lower … ” Nobody says that. It’s like, “You want to compound at six or do you want to compound at 10?” Well, I’ll take the 10. But the way that happens is in the tails. Your compounded returns in right tail environments, how much you capture and how much you avoid of a left tail environment.

And that’s our point is you’re going to capture more of the right tail by your allocation. And if you have enough convexity and protection in left tail environments, you can confidently absorb that extra risk. And that’s where it’s like we think we’re going to be better in the tails, and that’s what matters, because the ultimate goal should be higher terminal values for all clients, which means higher compounded returns. I missed the poll, I talked the whole time through the poll. Sorry about that.

Derek

It’s all right. We’re just trying to get a sense of what people-

John Luke

Evaluations and inflation.

Derek

… where people’s concerns are.

JD

Yeah.

David

Somewhat correlated, there.

John Luke

Not surprising.

David

John Luke, what would be your answer here? And JD, you too.

John Luke

I mean, I think that the backdrop for inflation is above 2% and I think that’s structurally on purpose. So it’s just a matter of is it three to 4% or is it higher than that? That really puts the Fed in a tough spot.

JD

I think my answer would be inflation. Inflation may be not the way that it’s defined, but just your purchasing power being eroded. Because I think, and Dave, you can argue with me here if you want, but not to hijack the call, but a true free market is deflationary. Your dollars should buy more things if productivity and efficiency are injected into the market. So this is like, and I don’t have the data, I don’t have a slide to pull up, but if you say, “CPI is 2% or 3%.” Well, the simple thing to me is like, “Well, if our money supply grows by,” I’m making numbers up here, but, they’re going to be somewhat right. Money supply growth has been 8% for the last however many years?

John Luke

50 years.

JD

50 years. But they say inflation’s averaged 2%. Well, to me that means there’s been at least 6% of deflationary productivity injected into the market. And that’s what makes me worried for most investors is because most investors are still so stuck to like, “I want to be safe, give me bonds, cash, T-bills, CDs.” And the whole time it’s like the money printer will not stop. It will not stop until something materially changes. And I don’t know if that material change is like two years from now, or 10 years from now, or 50 years from now. But until that changes here, you better own risk assets.

John Luke

Yeah, I mean-

JD

I think the answer is real simple too, because … Go ahead, John Luke. Sorry

John Luke

You were on a good one there. Well, I’m just going to say if government’s running six or 7% deficits as far as the eye can see, yeah, I’ll sell you as many 4% treasury bonds as you’ll take. And I think that’s kind of the perspective.

JD

Yeah.

John Luke

It’s funny because almost the most important thing of that poll was really slowing growth in my mind, because if our goal is to grow out of this, and that was the least picked answer, and maybe that’s where you’re going with it, Dave, but the growth piece I think needs to stay elevated to work our way out of the debt problem.

David

We know the number out there, John Luke. I was going to bring up the same point you did back in November, and I think we have a slide on this. Actually, we do, because I made the slide deck. Scott Bessent gave us our playbook, yet everyone continues to ignore the playbook he gave us. Talked about this on TV last week. He said, “We can grow our debt and our economy at the same time and that’s fine. The key point is we have to grow our economy faster than our deficit.” And our deficits at 6.5% right now. So that’s your hurdle rate. Your hurdle rate isn’t at 2%, exactly what JD’s talking about. It’s six and a half percent. It’s much higher than what we think.

JD

Yeah. And all the untouchable political stuff, what are you funding? What are you not funding? It’s going to come from print printed money. That’s where it’s going to be funded from. And one point that I’ll make on valuations, too, is when somebody says … This actually does make no sense to me, when somebody can really argue, “Hey, well, Dave, the PE ratio back in ’78 was X, and the PE ratio today, it’s astronomically high.” And I’ve been there, I was CFA trained. Until you see the world for what it is, you think that that matters. And the thing, think about a multiple to me is like, “Well, the P is going to inflate with money supply and everything else.”

And the more and more people realize their money’s being debased, purchasing power’s being eroded, I need to do something about it. Therefore, I will not park my money in. I’d rather hold gold. I’d rather hold Bitcoin. I’d rather hold stocks. I’d rather hold real estate. It’s why your house is gone from 400 grand to 800 grand. The E, the denominator will grow slower because it’s more GDP related. And our GDP is growing at what, 3%, three and a half, whatever the last number was.

John Luke

Really. Yeah.

JD

So you’re naturally going to lead, valuations should go higher because of that. Now, I’m not saying valuations don’t matter, but I’m saying it’s not apples to apples if you’re comparing the PE multiples of different decades, because everything changed in ’08, everything changed in ’08. And then everything changed again in 2020. And that’s like when everything changes again, it’s probably not going to be because we get fiscally responsible. That’s the point. Sorry. I’m talking too much on this call. Y’all can-

David

So we can trust those CAPE ratios, right JD? Those are definitely the North Star.

JD

Yeah. When somebody says, “Well, I’m not investing because the CAPE ratio is high,” it’s like, “Okay, good luck, good luck compounding.”

David

Can I be your market maker and take the other side?

JD

Yeah.

John Luke

Well, I’ll keep this somewhat brief. A number of our points really focus on just fixed income in general with a number of the slides following this. But if you look at the quarter for fixed income, it was pretty good. I mean, you had, the Fed kind of stole the spotlight between the July decision to not cut, and then the weak employment number for July at the early part of August, and then really with Jackson Hole and how pivoting the stance of focusing on the labor market instead of as much inflation. And so you’ve had three quarters in a row where the AG’s been positive. That’s been kind of a record since the interest rate hiking debacle we bonds faced. And so generally that’s been positive. You’re starting with higher nominal rates and so you’re collecting higher interest which helps mitigate some of the choppiness of interest rates.

But in general, the backdrop for the Fed from here is maybe more alignment than what most people think, if you look at the dots, which we’ll touch on that here in a sec. But I think the big scope for looking forward really has to focus on what’s the Fed going to give us? And obviously that’s very data dependent to what comes on the labor market, what comes with inflation. But I think that the backdrop from here is really focused on do we get four or five cuts next year or do we end up only getting one or two? Because there’s a resurgence of this tariff related inflation and it puts the fed in a tough spot. If you look at inflation swaps, the market’s not pricing inflation going below 2.7%, core inflation going below 2.7 throughout the whole remaining term for President Trump. And so obviously that doesn’t put the market or the Fed in a spot where they can really jump on it.

And then on top of that, if you look at the inflation backdrop, the Fed’s target’s 2%. We’ve been above target for over 50 months. We’re at 3.1% on core inflation, which is up from the recent lows this summer. And if you break it down between goods inflation, which really is key to anchoring inflation at 2% the last 25 years, for the most part goods inflation has been zero or even negative. And you’ve got service inflation, which continues to be above the trend. And so the backdrop from here to get a bunch of rate cuts is kind of difficult. And then you put on top of that, that the Fed’s even telling us inflation’s not going to go back to target until 2028. So by the time that inflation does get back into the Fed’s target range, you’re talking almost 90 months of it running above target.

And so there’s a credibility factor that I think at some point comes back into the fold. And so that’s really the concern here. And then when you put it in the backdrop of longer term yields and how those could play out, it’s hard to see, number one, that the 10-year bond goes to much below 4%. And if you put it into perspective of, “Well, if the Fed sits here and the next few months they see the numbers strengthen back,” which the last week, arguably, we got some really strong data, Atlanta Fed GDP at almost 4%. I mean, come on. And so the backdrop from that perspective is going to put the Fed in a spot where they probably can’t cut as much as markets hope.

And then on the other side, if they do cut, it’s likely that they’re cutting late, and so they probably overdo it. And so that could push the long end of the curve back up again. And so I’m still fearful of the back end of the curve. I think that there are a number of things that could play out and then obviously six or 7% deficits with 4% yields, just, that math don’t work. And so we continue to really be focused on fixing asset allocations as much as possible. And a lot of this is just noise, because if you think back to the big picture of what we just kind of went on a rant, a lot of that’s really driving things a lot more than does the Fed cut two times throughout the rest of the year? Do they cut four times by the end of next year? Really doesn’t matter as long as they’re still cutting. So I’ll tee it up there. Dave, you got anything?

David

Maybe talk about neutral, too, but how I perceive it from the small peanut brain equity guy, because we all know that bond guys are a lot smarter than the equity guys. I adhere to that all the time. But it just feels like the direction of deficit spend is really what’s driving rates more than anything right now. I mean, how I try to put it together where neutral is, you take real GDP and put in a historical term premium on it, maybe of a percent, I think the term premium is closer to the 53 basis points, here, but given the liquidity out there in the market and everything, it just seems, tell me if I’m wrong here, John Luke, that just federal deficit in the direction of the deficit just is what’s moving rates right now.

John Luke

Yeah. And I think that’s why you’ve seen rates move down. It’s been a combination of growth was a little bit slower, but also the tariff revenue has actually ended up being fairly significant, which has not stopped the deficits, but it’s maybe slowed them a bit. And so I think that’s a good way to think about it. The poll question there will be interesting to see. So everyone’s kind of leaning to higher,

Derek

Nobody thinks going thinks we’re going back to ZIRP, that’s for sure.

John Luke

I did not believe 2.5 that we’re going back to ZIRP.

JD

Because that that means we might be, we might be.

John Luke

Yeah, below 2.5 is a little vague, so that could be somewhere between negative rates and two and a half. We’ll never know where that one person stands.

David

Who could that one person be, John Luke?

John Luke

Yeah. Stephen Miran?

David

He made a great point. We all know, I ain’t know academia buff, I went to University of Kentucky, but he talks about just the cadence and direction of immigration, and the overall savings rate just showing that the neutral rate should very much be lower. I mean, that’s why he wasn’t a technical descend here by any means, but he said that the neutral rate’s substantially lower. I can’t show you the pros or the cons, the good or the bad against that, because again, academia ain’t my strong suit, but he made some pretty good cases, there.

John Luke

Yeah, I thought so, too. I would not be surprised between the GENIUS Act and the sort of leverage of stable coins if we look back up in a year and 2.5 is really in the cards.

David

Go small cap, then.

JD

Yeah.

Derek

That was-

John Luke

Yeah, let’s hope. All right, Dave, you got the next one?

David

Yeah, I’ll take it from here because John Luke, you made a great point right now, and last week’s data that we saw was very strong, whether it was retail spending or really any other thing you could pick, data is very strong. And one thing, this puts my brain in a pretzel right now is everyone who’s pro growth, they want rate cuts more than they actually want growth. If I’m investing in risk assets and I’m betting on growth, you know what I want? Growth. And that’s what we continue to get, not just on the macro side, to John Luke’s point, but also on the fundamental corporate earnings side of the picture. I mean, this was probably one of the best earnings season, Q2 2025, that I’ve ever seen, especially heading into expectations. I mean, the results, what we saw during the Q2 earnings season was better than the expectations pre tariffs.

We had revenue growth of the Bengals’ current quarterback jersey number six, Jake Browning, 6% revenue growth that equated to 13% earnings per share growth. That is unbelievable. We all know that most of it did come from the Magnificent 7. The Mag 7 grew their earnings, I think it was like 28% on a year-over-year basis. That’s like three quarters in a row that they’ve seen growth within 28 and 30%. And that’s off the heels of growth of 60% four quarters ago and five quarters ago. But we all know, as I mentioned on the introduction of this call a lot is this coming from the CapEx spend. I don’t see it slowing down anytime soon, but I think the chart on the top right here shows the Mag 7 free cashflow growth X NVIDIA on a year-over-year basis is starting to go negative.

It could see that there might be a light at the end of the tunnel over the next few quarters or years where that slowing really stops. More so, that’s probably the basic laws of math. You can’t grow with 28% in perpetuity. The law of large numbers really comes to equation. And I think that’s really what we want to see. And Brad and I saw this with a lot of our earnings reports, especially on the smaller cap side, there’s some pretty good optimism on the smaller cap side of the ledger. When you look on the chart on the top left-hand side, you’re starting to see the average stock start to grow above the Mag 7 in the second quarter of 2026. You actually go to a chart that I had earlier on here. If you look at small caps as measured by the S&P 600, they’re expecting the growth there to overtake large cap, I think in about two or three quarters, so actually before the residual S&P 493.

But overall, it was an amazing earnings season, and I think it’s just another reason to be optimistic, especially from an operating profit margin. And we saw operating profit margin of the S&P 500 continue to go higher. And as many of you guys have heard me say that when operating margin is going higher or tracking sideways, it’s very difficult for this market to get into trouble. It’s when profitability starts to be downward sloping when the market tends to get in trouble. We just haven’t seen that whatsoever right now. So all in all, amazing earnings season and I definitely think it puts the Fed’s job in more of a precarious difficult situation because as John Luke said, “It’s tied all back in. Growth is apparent out there.”

JD

Can I make one obvious point from an Aptus perspective? Because I get, so we’re pointing out a lot of these things, JL has got a couple more things. But this is our like cheat code is if we’re right on risk assets higher, bonds are terrible place to be, all that kind of stuff, our clients are going to be happy. Our portfolios, our allocations should do well. If we’re wrong and these overvaluation fears and all that stuff, that’s actually okay with us too, because one side of us is like, “Asset allocation, more risk assets,” all the things that we’ve already said. The other side of it is like, “We believe in negative carry convexity.” So your portfolio has to have it, in our opinion. Negative carry means you’re going to pay to own it. Convexity means you risk a dollar to make a much bigger profit.

And so if we are totally wrong, and markets, they reset 30, 40, 50% lower, our hedges are going to print money. And guess what we’re going to do with that printed money? We’re going to buy a lot more risk assets because the backdrop wouldn’t have changed, it just took a pause. And that’s where it’s like, so again, going back to the theme of feather in the tails, maybe not the theme for the quarter, but the theme for Aptus, that’s our point when somebody says, “JD, you’re really wrong, markets are way overvalued. There’s so much risk in this market.” We’re okay with that, because we should protect more like a traditional allocation. Where does the money come to buy more equities at depressed values? It comes from the hedges that we have in place that are just sleeping, ready to wake up if the market allows them to.

And that’s where the conversation me and John Luke have every single day is VIX is at 12, or 14, or 15, or whatever it is, it’s like, “Let’s buy hedges and own risk.” And that’s what we try to do. And not every advisor listens to us like we’d like, but that’s okay. We think an influence of, “Hey, if we can shed some of the traditional fixed with this backdrop, we’re going to be better in the tails on the upside.” And if the right tail doesn’t realize and the left tail does, then our hedges are number one, they’re going to protect us and they’re going to provide the capital we can deploy. And that’s a comforting thing to know, especially when you’re as out loud as specifically me, but hopefully Aptus is on risk assets go up from here.

John Luke

Yeah. And the backdrop too, of just the cost of hedge is back to some of the cheapest levels we’ve seen in quite a while. And so as frothy as things are in terms of markets being optimistic and earnings, well, they aren’t really paying to protect the tails, so we’ll be ready.

Derek

We’ve got a couple of questions that came in. I don’t want to run it too long, but we can at least tackle tackle one or two. Someone throwing it back your way, JL about the Ryder Cup. “International has been way ahead all year. Dave made the point at the beginning, ‘Not quite as much lately.’ What do you guys see about the sustainability there?”

John Luke

Yeah.

David

I do-

John Luke

I’ll start and let Dave let close, but if you look at the performance of the dollar, a lot of the decline came in the earlier part of the year, which I think was a big part of the outperformance of across the pond stocks. And then on top of that, it was right in the mix of many of these governments having different plans to stimulate fiscally. Whether that plays out and whether it’s big bang for buck, I don’t think that Defense spending usually translates into big economic growth, kind of plays out.

So our thought is the bulk of that was really coming because the dollar’s down almost 15% on the year. And so if you put it in those terms, that’s a big buoy for many of these companies. And then the thought that the growth would continue into the future and put these countries on a competitive level with the US, I just see almost daily data points that talk about how far ahead that the US is in innovation, productivity, deregulation, lower taxes. And until that changes, it’s just really hard to get excited about international.

David

George Straight said, “Write that in stone,” John Luke, that was just perfect from an equity perspective, right there. And international continues to outperform the US by 10% year to date, but a lot of that outperformance happened in the first quarter of this year. If you really go back to the recent market bottom on April 8th, they’re pretty, very much close in overall performance. I think EM might be leading a little bit, it’s probably closer to small cap land. And as we all know, like I always say, “Follow what the market is telling you.” And right now it’s starting to show some optimism more here in the United States than abroad.

John Luke

And Dave, how much of that’s because the One Big Beautiful Bill? If you look at the tax receipts to the government from corporations, it’s down pretty big. So presumably that’s either investments in future or cash that they can buy back their stock.

David

It’s straight CapEx. I think Strategas did a study, they looked at all the S&P 500 earnings transcripts and I think like 402 of the 500 companies spoke about the One Big Beautiful Bill being a pretty strong catalyst for their overall business moving forward because of that CapEx side. I would say-

John Luke

Maybe another-

David

John Luke, I think me and you talked about this.

John Luke

… win for small caps.

David

No doubt, no doubt. I mean, hopefully that flows on down. But John Luke and I were talking about with Brad, think it was a week ago, John Luke, was it a corporate tax revenue is only about 15% of the overall tax revenue for the government? The residual comes from income taxes, and social security, and what not, right?

John Luke

… from the individual

JD

Yeah. And I see just so the trend of ex-US outperforming after several years of underperforming is already over? And I think what we would say to that thinking about from an allocation standpoint is like, “We have no idea. We just don’t want our portfolios to have a monster bet one way or the other.” Dave, JL, feel free to argue with me. But if you’re allocating, I think we’re always going to lean slightly underweight, maybe not always, but that’s typically what, relative to a benchmark, we’re going to be slightly underweight just because the behavioral side of it is not worth it. If we’re slightly underweight but we still have plenty of international exposure, and they outperform, that’s fine.

But if we make some mega bet on international verse domestic and we get it right, nobody cares if we get it wrong, everybody does. And so it’s like, “We’re going to be slightly underweight for the reasons that these guys mentioned earlier.” But we have no idea about, I’d rather hold stocks of any variety than bonds but have no idea if US is going to outperform or underperform. We’re just not going to allocate based on some conviction there.

David

Yeah, think about the opportunity set at hand there, too, because I always try to compare apples and oranges as much as you possibly can in this industry, which is very hard to do. But international’s trading a 30% discount to the S&P 500. You know what other asset class is? Small caps. And small caps, you can see growth of 10, 11, 12% on a year-over-year basis, started here in a few quarters. And I mean, I don’t remember the last time I saw international securities getting a double-digit growth rate in the last 10 years, to be quite honest. And if you’re thinking about it from an evaluation perspective in a vacuum, I would take small caps, which have growth drivers, over international any day of the week.

John Luke

Yeah, the CapEx that we just talked about should be a big benefit.

Derek

You guys-

John Luke

All right.

Derek

… you want to take-

John Luke

We got one on consumer spending.

Derek

… any more of those questions, then, you want?

JD

Take the peak.

John Luke

Yeah. Consumers … Yeah.

JD

Go ahead. Go ahead.

John Luke

Consumer spending’s come in a bit hot. How much of it’s growth or inflation/tariff related? So I think you’re seeing companies, especially higher quality companies really focus in a lot of their guidance on passing through the price impact from tariffs. And if you look at goods inflation, it’s up about 300 basis points from the lows last June, and it’s about one and a half percent of the contribution to core inflation in general. And so I think there’s probably more of that to come as companies will try to protect margins and pass through. I guess the good thing is maybe not for the Fed, but the good thing is it will probably be some incremental increases and not 20% markups tomorrow.

David

I could care less if the growth is coming from inflation or tariff related, because it’s still growth, and it’s still strong growth. And right now, I haven’t actually done this table in quite some time. It’s probably the first time I’ve filled this chart out in over a year. And it’s one of my favorite charts we’ve probably put out in five years. And it just talks about the health of the US consumer, because any headline article you read, like, “Ah, the consumer strapped for cash.” Or, “Hey debt, credit card balances have never been this absolute high. The overall debt of the consumers never been this absolute high.” Well, look at this line here towards the bottom, it just talks about total liabilities. Over the last 10 years, liabilities have grown by 46%. Okay, well the total assets have grown by 90% and last time I checked my math skills, 90’s greater than 46.

So it just shows you that the health of the consumer, they are so much more profitable on their own. Obviously, you could segment this into quintile, like the lowest quintile consumer versus the highest quintile consumer, but at the end of the day, we know that the top 10% of spenders drive 60% of the overall spending. If you do like the top 30% of spenders, it drives like 70 to 80%. Now, as altruistic as I want to be about the lower quintiles or the lower deciles, they don’t drive spending. Because if you do look at this chart, a lot of the growth in the net wealth has come from stocks. It’s come from real estate.

And that’s exactly what JD’s talking about 10, 20, 30 minutes ago. And we just want to own risk as much risk assets as we possibly can because that is where your accumulation of wealth really comes from. It’s not out there being conservative, having your money in deposits or whatnot. It comes from owning hard assets or risk assets themselves. And this chart is just a great picture of it. And it just shows that the consumer right now, it can handle of these one-time related tariff pressures or any of the inflationary pressures because the consumer’s really strong. As long as the consumer’s strong, it’s hard for the market to get in trouble.

Derek

We’re at 45 minutes. I think we can combine three questions into one, these AI questions do hit on a couple things. Number one, “Is there a risk of a bubble? Is the NVIDIA OpenAI deal indicative of a bubble?” There’s a question about PEs, “Are they higher now because now it’s tech versus used to be more industrials, asset heavier companies?” Tying that all in, somebody, sorry to tie in four questions, but tying it all in with what JD said earlier about own risk assets and hedge them, maybe you can just touch quickly on if there is a bubble, does it matter? Who owns what? Because we do get a lot of questions. Everybody’s talking about AI from an investment standpoint. “Am I exposed? Am I overexposed?” Clients calling in, “How do I get exposure?” Calling their advisors, “How do I get exposure to the theme?” And I think the more we can do to help advisors talk through a really rational way of approaching it probably makes sense. Sorry, I rambled, but I was trying to paraphrase four questions into one. So make this the last one, and you guys can all talk about it.

David

John Luke, I’m going to have you help me out with this one, too, especially when talking about valuations and how investors need to see the forest of the trees on how that’s evolved over longer periods of time. But I would start off by saying please reach out to us about this entire question on how we attack this whole AI narrative at the allocation level. Of course, we always bring stuff back to the allocation and how we’re investing with AI. We have a great piece written about it. Please steal it. Please take it. First, please ask for it and we’ll send it on over to you because I think the best way to play this AI boom is simply owning more risk assets, because that rising tide should lift all boats, especially as you see the downward mechanism for optimization amongst the residual part of corporate America increasing their profitability. But it’s best not to try to pick your winners and avoid losing the AI space. Attack the AI situation, the AI theme at the allocation level. So ask about that piece.

But when it comes to is AI in a bubble or is the bubble going to burst in the next year? I would not think so. I think that there’s a lot of scariness out there that the market, media tries to put out there, especially with the circularization or the circular network effect of, “Hey, NVIDIA is investing in Intel. NVIDIA is investing now in OpenAI, that the revenue sources are heavily circular.” But NVIDIA understands, one, they have a ton of free cash flow, a lot of cash that they can spend. They just see an opportunity to invest in the future. As long as you have a positive IRR, I would do it myself. If they think that they could put in a $10 billion investment or a hundred-billion-dollar invest department into OpenAI, but it could secure some type of positive IRR for the selling of their GPUs, whether the Blackwells now or the future iterations of their GPUs in the future, as long as it has more of a positive return than a hundred-billion-dollar investment, that’s a smart investment.

So I don’t see the circular aspect being a problem or being a mechanism that, “Hey, we’re getting closer to that bubble bursting.” I think one of my favorite quotes that I wrote in this slide deck this quarter was talking about the largest of large companies. Historically, the largest large companies tended to be in monopolies and they wanted to keep their monopolies, so they wanted to kind of inhibit overall growth. Well now these mega-cap, large-cap companies, they’re not an inhibitor of growth. They’re now an engine of growth investing in AI as a whole. That isn’t just going to help them. It’s going to help the overall economy. So there’s been a substantial shift, I think, in the mentality of how we need to think of these largest companies out there, that I’m not worried about it.

Lastly, on the bubble side of things, a lot of these companies are still funding this growth through free cash flow. They’re not going through equity, they’re not going through debt. Back in the dot-com bubble, all the growth was funded by equity, it was funded by debt, and valuations were actually substantially higher than what we are seeing nowadays. So I’m not worried in the near-term that there’s some type of bubble. I think that the risk here is back to the first poll question Derek put out that you could see some growth deceleration amongst some of these Mag 7 companies. We all know if you read any of our stuff out there, operating leverage is a core tenet of the S&P 500 nowadays. And if you get a slowing overall growth, that could maybe contract margins a bit and the market may take that a little bit difficulty. But I don’t see this being a bubble right now.

JD

And if you’re invested, you’re exposed to AI. That’s the biggest thing, is you don’t have to go to some AI-specific fund. You’re going to be, I think forward profit margins, there seems to be really exciting expectations there. And maybe AI is the growth engine that everybody hopes it is. I have other worries about it that aren’t necessarily investing-related. But that’s our whole point, though, is that the allocation level, we want engines, we want the strongest engines possible. And hopefully AI is going to be a great for growth, for real growth. But if not, that’s why we have breaks. That’s why we get called bullish all the time because we are bullish for risk assets, but we don’t ignore risk. That’s why we have negative carry hedges in place at all times.

So we’ve got risk assets that are exposed to the things that hopefully lead to real productivity and growth, but we’re going to carry hedges with us every step of the way. And those are the things that protect capital and create opportunity to deploy capital when real risk hits. So that’s one thing. Obviously, we’ve pointed that out, but I do think that you don’t have to have some specific AI investment approach because you’re getting exposed to it. Every company is using AI at this point.

Derek

Awesome. Thanks, guys. Dave is leading the charge on all of the quarter end materials and presentations, and we’ll have that stuff turned around. I know he takes pride in getting it out on the first of the month, and so keep in touch. We’ll send to everyone we know, but if we’re just getting to know you, shoot us a message, info@apt.us. Shoot us a message and we’ll make sure you get updated with all of our materials. So thanks for making time for us. Thanks, guys.

John Luke

Thank y’all.

JD

Thank you.

David

God bless y’all.

 

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Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.

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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-2506-64.