Webinar: 2025 Recap and 2026 Market Outlook

Full Transcript

Derek

Welcome everyone. We are excited to bring you our year-end recap. More importantly, look ahead to what’s coming in 2026. So got three of the head dogs here, with JD Gardner, the founder, chief investment officer, we’ve got John Luke Tyner, head of fixed income, Dave Wagner, head of equities. I’ll do my disclosure and let the smart guys talk. 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 2 which is available upon request. Let her rip.

JD

D Hern, you always do a great job with that disclosure, thank you for reading that. And thanks everybody for joining, Merry Christmas a few days early. Hope everybody’s had a great year. We appreciate you being here. I’ll be brief and I’ll chime in, I’m sure, as JL and Dave are covering things. But I just wanted to stress, going into 2026, I think you’ll see a few different things from us. I think there’s consistency in our message. But in our ability to provide solutions to express how we think portfolios should be positioned, we’re going to be more aggressive than we’ve ever been in 2026. There’s going to be more strategies. The roadmap for product development is as full as it’s ever been, and I’m really excited, considering the competitive advantages that we have specifically in the buffered space, I know you’ve probably seen a couple write-ups on that, but we think that’s a huge market, and the advantages and the appetite for the market that we have in the buffered space is going to be exciting to really dig into. So stay tuned for something early Q1 of next year.

And then, from a people standpoint, I think you’ll meet a few new faces, and we’re going to continue to just try to build into option overlay any kind of high-net-worth services that we can provide that helps position you in front of clients and helps increase CAGRs of portfolios. That’s our focus, and we really appreciate all the relationships we have. Hopefully, we have some new faces here. But we’re excited for 2026, and you’ll see a marketing push from Aptus that we’ve never really done, so I’ll probably have to talk more than I like to, but I think we’ll look forward to that. So Dave, JL, y’all kick it off. I’m sure I’ll chime in.

Dave

Yeah, I’ll take it from here. First of all, thank you so much for everyone on this call for being here, being our partners. We’re just so grateful for everyone here, because it’s the people listening to this call that allows myself, JD, John Luke and the rest of our entire Aptus team to do what we love doing. Without y’all, we can’t do what we love doing, so from the bottom of our hearts, thank you so much for being our partners.

But looking at the list of people on this call, there’s a lot of new names here. So it’s so cool to see us get a few hundred people to our annual outlook call for a small firm out of LA, and everyone here knows that stands for Lower Alabama. But if you haven’t been on one of our outlook calls before, we always like to start with something a little bit more upbeat, a little bit more optimistic, simply because we live in an investing world that tends to be lived through the lens of a pessimist, and that’s just not how I like to go through life. We love being rational optimists, is what we like to say here at Aptus, and that positive message that I want to start this call off with is in regards to the ethos that we have here at Aptus. It’s basically just a set of morals that JD has instilled in the entire team at Aptus that we do in practice, but it’s really not something that we mention that often, except for right now.

But there’s three main ones that JD always talks to us about, and it’s that we don’t want to take any partner for granted. We want to try to develop every single relationship with our partners every single day. The second one’s that we don’t want to focus on being smarter than everyone else here. We want to focus on creating long-lasting relationships and providing the best customer service in this business. And as what you just heard from JD there, we’re so excited for the new opportunities that we’re going to have heading into 2026. But the third and final ethos is probably my favorite here, is that we take our work very, very seriously, but we don’t take ourselves too seriously. So I hope that everyone on this call tends to see these characteristics from each one of the Aptus’ team on a daily basis, because it’s something that we really truly believe in here at Aptus, and we’re never going to give up that core morale of this Aptus team. So I’ll start there. But before I go to theme, JD, John Luke, do you have anything to add?

JD

Roll with it.

Dave

Cool. So as I mentioned, my favorite ethos is that we take our work very seriously, but we don’t take ourselves too seriously, and I think this annual outlook is probably a perfect summation of that ethos in its own. And each outlook that we have, if you’ve followed us for quite some time, it’s based off of some sort of crazy or eccentric theme, themes like the 1980 movie Airplane!, Larry David, who created Seinfeld, his show, Curb Your Enthusiasm on HBO. We’ve had Ted Lasso, Atlas Shrugged, and a few others. But this outlook piece is probably my favorite piece to write throughout the entire year, and the theme for this year heading into 2026 is going to be based off of a cult following movie that came out in 2000 called American Psycho. So I probably should first give a shout-out to our compliance team for letting me be me when I do my pieces because this will probably push the limits more into the gray area than what most investment professionals should be writing or reading.

But when I look back at some of our other themes, like last year’s theme, I think we hit the nail on the head, it was off the 1980 movie Airplane!, it talked about two themes. One, that we’re believers in risk assets, and it’s likely that the airplane is going to land on that proverbial runway, that continues to get shorter, through some version of a soft landing. But more importantly, it was based off of trying to show investors how this market’s evolved over longer periods of time, to where there’s probably going to be more tails in this market, both good tails and bad tails, so good tails are right tails and bad tails are left tails.

And one thing that I continue to tell all investors, whether it’s on calls or at conferences, is that if you go back to 1942, the market tends to see one 20% pullback every five and a half years. Well, fast-forward to the current decade that we are, in the 2020s, we’re just over five and a half years in, and we’ve already seen three left tail events, one in 2020, one in 2022, and the most recent one here during the tariff tantrum that we witnessed over the last 12 months back in the early part of April, the market pulled back just over 21%. So we do believe that tails will occur more often on the left side, but also the right side. And everything that we read and write specifically after in regards to our asset allocation structures, how you do in the tails is how you are successful with your client’s portfolios over longer periods of time.So if the tails are going to occur more often, let’s make sure we can prep and have the right safety mechanisms or risk-on mechanisms to take advantage of those tails themselves.

But now that 2025 is in the rearview mirror, let’s talk about the windshield, let’s look into 2026, so onto American Psycho. And the basis of this theme is that I think Americans need to be, one, psycho about asset allocation structure, make that one’s investment identity. But two, also be psycho about the prospects of US stocks and overall risk assets moving forward. Because I think as we head into 2026, the burden of proof really continues to fall on the shoulders of the bears, because the momentum that we have right now, it’s just a continuing strong force in the market, and until fundamentals change, I think investors need to be more patient than clever. Patient by continuing to own risk assets than clever by trying to time the market itself or try to time some type of top.

But at its core, you’ll hear John Luke talk about, and myself, that it’s very important to remain nimble, it’s important to remain balanced, so don’t get too bullish, don’t get too bearish. And most importantly, don’t let the political narrative, as we go into a midterm election, get in the way of investing. Politics should never be included in anyone’s portfolio. But if we look at the movie, American Psycho, it’s basically a searing dissection of the 1980s yuppie culture as it depicts its main character, Patrick Bateman, and his journey from being a part-time Wall Street broker to a full-time serial killer. Well, that in its own probably right there is a pretty fun storyline. It’s actually not the underpinning main thesis of the movie. It’s more about the idea of wanting to stand out in a world when everyone’s identity is the exact same, and that’s what Patrick Bateman’s doing in this movie, but he does a better job of just playing the part than truly fitting in with others.

And to tie it back to investments, that’s exactly what investors continue to witness in this current market backdrop. So the level of consensus, it just feels to be so much at all-time highs. I know John Luke and I, we were talking last night, that we probably read about 10 to 15 outlooks, and really everyone is saying the exact same thing out there. So there’s a high level of group think, there’s a high level of consensus. So back to the movie, it’s very difficult to stand out when everyone’s investment identity is the exact same. And it doesn’t feel like we’re taking the learning lessons from the unexpected twists that we saw in 2025, such as the tariff tantrum, the low-quality rally, international performing for the first time in a very long time, that should have provided investors with ample food for thought, as consensus was, one, upset by a large magnitude, but it was also, two, upset multiple times.

And that’s why, at Aptus, we want to be psycho about the asset allocation structure, because that’s what we should believe, that’s what we want an investor’s identity to be, to be able to stand out. Yet, this is not the focal point for really investors ever. That belongs to stock picking, manager selection, and other parts of the investment business that I would consider to be the sexy work. But history has shown that asset allocation effects tend to drive the majority of long-term total returns, not that fun, sexy selection piece, which currently has a high degree of group think. So I think in a world where we’re trying to fit in with others, like Patrick Bateman, don’t just play the part. Be different, focus on what actually matters, and that’s the structure.

The second thing we want to be psycho about is going to be in regards to US assets, specifically US public assets. And we’ll talk more about these different subjects as we get into the meat of this presentation, but the core tenets of this market, they continue to remain. The gas pedal of fiscal policy, the gas pedal of monetary policy and the gas pedal of private spend, it continues to be pushed to the car’s floorboard. And I think that investors are starting to recognize how some of these policies, specifically on the fiscal and monetary side, are really starting to debase their capital, and investors are recognizing the necessity to own as much risk assets as they possibly can.

But some of the biggest questions that we get asked on phone calls is, moving forward, “All right, Dave, your psycho about American public assets, what about international returns?” Obviously, international returns, they did leave the S&P 500 this year. Both EM and EFA have a total return so far year-to-date of about 30%, while domestic US public assets, as measured by the S&P 500, they have a return closer to 17%. So said simply, international’s beating the US by 13%. We tend to have a structural overweight here to US assets instead of international assets, but John Luke makes a great point, he’s talked about this on a few phone calls, that 13% relative outperformance that you’re getting on the international side, that’s basically all due to a weakening US dollar. The US dollar has virtually weakened, what, 13% to 15% so far this year, so all the outperformance of international versus domestic has come from currency translation.

If you look at earnings growth, earnings growth here in the United States still was very much better than what we saw on international, and that’s why we want to be psycho about the American stock market moving forward, because of those three core tenets that I just mentioned too, but also given the amount of operating leverage included in the overall market. So Derek just brought up a poll here, Derek knows I love polls, so I’d ask everyone to participate, we’ll give you some of the answers. But the first poll question is simply going to be, what do you think the S&P 500’s return is going to be in 2026, four choices, 15% or more, 6% to 14%, plus 5% down to minus 5%, or down more than 6%?

Derek

And we probably made it too easy by giving the default. Everybody says 8% to 10%, or maybe a little expansive on that, and I’m guessing that’s where most people will fall, but it’s always neat to see where the outliers might be.

Dave

Well, I would say to that, Derek, since 1950, the market has been giving you a return in, what, that 6% to 8%, that average amount, or 7% to 9%, only four times in the last 75 years. So even though it does feel to be the default answer, it doesn’t happen that often.

Well, that’s where most people came in. 55% of people said that, “Hey, we’re going to get some positive returns, risk assets are still going to work.” It might not be to the right tail extent that we’ve had so far this year, but that seems to be where consensus is here, 6% to 14%. I myself, I actually think I’d be in the category of 15% or higher. I think returns are going to remain strong, which you’ll hear us talk about as to why here soon. But that doesn’t mean that the market next year isn’t going to have some type of volatility that goes on some type of Patrick Bateman-style M&A murder spree, which obviously from the movie stands for mergers and executions, to a point where it stops the bull market. I don’t think that that’s going to occur.

I think bull markets, they last longer on average than what most investors think. Bull markets, they tend to last, as this chart shows you, 67 months, and it tends to have an average return, during that bull market, of almost 200%. So for context, for reference, right now, we’re about 38 months into this current bull market that started in October of 2022, with a return, as measured by the S&P 500, just under 100%. So I think if one becomes too bearish on the market right now, to bring in another American Psycho quote, I think you’re going to get duped into thinking that you were going to have dinner reservations at the famous Dorsia, eating the sea urchin ceviche, but instead, we’re taken to Barcadia.

Last fact I’ll give you before I pass it off to John Luke here is that I do believe there should be some type of volatility next year. Midterm elections are next year, and history shows you that year two of a presidential election cycle, which tend to be four years, next year’s going to be year two, they do tend to see the worst return on average versus the other three years. Not only that, they do tend to see more volatility intra-year. On a normal year, the S&P 500 has a drawdown, say, of 16%, that’s actually the correct number. During midterm election years, you tend to see an average peak-to-trough drawdown intra-year of about 19%, and that actually flows down to the lower market capitalization stocks. Small caps tend to see a 22% pullback during midterm election years, when on average, they tend to see 19% during the other years.

But moving to the final chart here to pass off to you, John Luke, to give you a heads-up, I think this is probably one of my favorite charts that was in the outlook, definitely my favorite chart within this presentation, because it shows you the annual versus cumulative inflation numbers. I think the market teaches you that you want to think in terms of an economist and the annualized increase in inflation on a year-by-year basis. But I think the cumulative inflation number is more important to everyone sitting in the advisor’s seat or in the asset allocator’s seat, because that’s what matters specifically over an investor’s time horizon.

We’ll talk a little bit about the basement and inflation, because I think the word affordability, even last night during President Trump’s speech, affordability gets tossed around a ton right now, and I think affordability is really just a nice way of saying… It’s a right-click synonym for inflation or debasement itself. So everyone knows here at Aptus that we’ve never really liked fixed income, and to compare that to American Psycho, I don’t think fixed income is like Phil Collins at all. I don’t think bonds work best within the confines of a group, I don’t think bonds work best in the confines as a standalone asset class, solely because of this chart right here. So take it away, John Luke.

John Luke

Awesome. Yeah, the analogies to American Psycho can go on and on, and all of them are tongue-in-cheek laughable. But I think this graphic really shows one that we’ve shown quite a few times this year, with the purchasing power of your dollar and how it’s decreased over time, where there is continual debasement of the currency. And as consumers, we feel the cumulative effect of inflation while economists look at the year-over-year change.

And you can certainly see that with some of the Fed’s decisions the last couple of months, where they’ve really switched from focusing on the inflation mandate to really focusing on some of the degradation in the labor market. And so, we can’t expect to see this line converge. The Fed’s objective is never to bring down the cumulative inflation, it’s to slow down the inflation looking ahead. And so, when it comes to the asset allocation mix, it really stresses the main point of owning risk assets that can keep up with that cumulative increase versus focusing too much on the year-over-year noise. And I think this chart really reads to a lot of the consumer sentiment that you see with University of Michigan and other surveys, where consumers feel the effects of their wages not keeping up with the level of cumulative inflation.

And so, I think the positive from here is it seems like the Fed has a much better grip moving forward, but there certainly has been a one step up in the price level of things. I think long-term, it’s just a continuation of that happening. If you look at the trend of inflation, as we see it and as we experience it in real life, versus a trend of 2% inflation over a long time, there’s a mile-wide gap between the two. And the key takeaway is that you have to own risk assets that can keep up in that environment of continual debasement.

JD

Yeah. And John Luke, the thing that’s important to note just as a business, this is why we’re an options-based shop, because we are not saying you’ve got option A stocks, option A bonds, own all of the stocks, none of the bonds. While that’s probably going to work out long-term, we really recognize the majority of wealth is held by folks that don’t love drawdowns in their account value, that don’t love equity fall. So that’s why we started the business as an options-based shop, to be able to say, “Hey, there’s other ways you can absorb these risk assets while keeping left tails very manageable so your client outcomes are the highest.” Because I’ll die on the hill of if you can generate higher CAGRs for clients, that’s all that matters. And protecting purchasing power is often not focused on, but we think that’s the largest risk, considering our backdrop, because, I know JL will touch on some of this, but the options that we have as a country all lead to we’re going to have to print more money, and you better own risk assets.

John Luke

Yep. And inflation has been above target for a long time, and it still appears like it’s going to be another year to two years before it even comes back to the Fed’s target on a year-over-year basis.

Dave

So we mentioned at the beginning, at the get go, the core tenets, these key tenets of the markets, they remain. And to be honest, as I mentioned before, each one of them has the pedal to the metal rate now on how much capital and liquidity that they’re injecting into the market, and it’s going to come from fiscal policy, monetary policy and private market expansion.

And on the fiscal policy side, the old saying, once you get the toothpaste out of the tube, it’s really hard to get back in, fiscal policy is no different. People have always died on the hill saying that Democrats like to spend, and Republicans, they tend to be more financially conservative. That’s just not correct anymore. Every politician loves to spend. If there’s some type of excess surplus in the budget in Washington, D.C., we know exactly what’s going to happen to that capital, it’s going to get spent, it’s going to get pushed out there into the market. Last night, we had another great example, with the $1,776 checks going out to our soldiers here in the US. God bless America and our troops, of course.

But what we’ve learned over the past few years, and for quite some time, is that we are going to run our budget at some type of deficit, and to JD’s point, that means that the printing press is going to have to come on. But moving forward, our fiscal spend and our deficit as a percentage of GDP, it’s going to continue to increase a little bit here, but more importantly, it’s going to be running a deficit of about 7%. So that’s just another reason why, one, you need to own risk assets, because as JD always says, you own the risk assets that appreciate or the currency that depreciate, and we just know that this fiscal policy spend isn’t going to slow down anytime soon.

And that’s why I love this chart on the left, it shows you just different geographical areas of the world that have started to utilize some type of fiscal authority to inject capital into the market. And the fiscal policies that we have coming out of the One Big Beautiful Bill here is that there’s going to be a lot of consumer liquidity injected into the market in the first half of next year. I’m not sure on the specific amount, John Luke and I have gone back and forth on this, but it looks like maybe $150 billion to $175 billion are going to be seen by consumers here in the United States, given the whole debacle going on with K-shaped recovery, where tax receipts are going to be going back to consumers in the US. And consumers are very much just like the government officials on their own. If they have money burning a hole in their pocket, they’re going to take that money out and go spend it, and so that’s obviously going to be an injection of growth into the market itself.

This circle of fiscal policy, it’s really just never going to slow down, and next year, it’s going to be somewhat on steroids, specifically in the first half of the year.

John Luke

Yep. And you kick it to monetary, and after a long wait this year, we have gotten 75 basis points of rate cuts to add on to the hundred basis points from last year. And contrary to many of our beloved economists’ beliefs, tariffs have not led to the inflationary uptick that was expected. And so, between rate cuts that have happened, and will continue to flow through the economy as they lag, as well as more rate cuts probably to come, the balance sheet expansion, or at least the halt of quantitative tightening, and the beginning of at least QE light to some degree, you’ve got a big backdrop where many things from a monetary policy perspective can continue to support the economy. And I think that will be a big focus from an affordability perspective, of bringing the front-end of the yield curve even lower than it already has been, whether it’s mortgages for consumers or whether it’s refinancing the US government debt, which we’ll focus on that here in a few.

But as we’ve said, for the last couple of years, the Fed has a war chest of things that they can supply into this market if there’s any volatility, and I don’t think that that perspective has changed.

Dave

John Luke, here’s a crazy stat that I read the other day, and it just shows how, I don’t want to say dependent the market is on monetary policy, but how so far helpful, I guess, it’s been to returns of the S&P 500. If you go back to 1997, the S&P 500 had had a return of 822%. But if you remove your data set of returns from FOMC day and the day before FOMC day, that equates to like 7% of trading days, the S&P 500 would currently trade at a level of 3,000 instead of closer to 6,900 than it is today. So one, that shows the effects of compounding, but two, how much monetary policy has helped at least stimulate risk assets through the measurement of the S&P 500.

John Luke

The market loves that boost.

Dave

Fiscal or monetary, or, to the third point here, the third key tenet of this market, and it’s just the private market expansion. I know it’s a very much hated trade right now, whether it’s on TV or with the people of Twitter, everyone wants to bet against AI. But the CapEx spend from the major five hyperscalers, it’s not going to slow down whatsoever. And we all know who those major hyperscalers are, the big four, plus some, Oracle. And if you look at the expectations for this year, 2025, you had CapEx hyperscaler expansion of about 68% higher than the previous year, close to almost $400 billion of capital being spent into the market for this. And that’s not going to slow down in 2026, when you’re expecting that spend to go up 34%, or another 15% in 2027.

I would say historically, analysts, economists, Wall Street folk, they’ve gotten this number wrong on the low-end of the side. I’m not saying that these numbers are going to go higher, I’m saying that there’s the capability or opportunity where they still probably can, and that is just more capital getting injected into this market in its own. But to put that in context, $400 billion this year of private market spend on hyperscalers, that is larger than what a pre-COVID fiscal bailout package was. So you’re getting fiscal policy on steroids, you’re getting monetary policy starting to get more on steroids, to John Luke’s point, and private market spend from private companies is also pedal to the metal. It’s really hard to bet against this market right now. I’m not saying that there’s not going to be a pullback. We know pullbacks, they’re healthy, they’re normal, I love the reset of risk assets. But I think the path of least resistance is just going to be higher for public risk markets.

John Luke

Yeah. And just one stat to add on to that expansion, over the last four years since 2021, we’ve seen a 42% annual increase in manufacturing spend and build-out on the commercial side. And I think as those numbers continue to flow through the economy, you can see a lot of anecdotal data and evidence that people are willing to make the investments for the future into both the AI spend, as well as just more manufacturing and industrial capacity at the US. I think politically, that’s a big point as well.

Dave

Yeah.

John Luke

Yeah. So as we talk some on our bond outlook, when you look at what we’ve seen this year, obviously we highlighted the rate cuts. You’ve seen a lot of commentary on how the long-end of the yield curve hasn’t declined like it would’ve historically done in past rate cut cycles. But what I think that it has shown is, compared to the rest of the world, the long-end has been pretty muted in terms of the impacts. We’ve seen the curve certainly bull steepen, where the front-end has moved lower and the long-end has kind of stayed in a range between, call it, four and four and a quarter on the 10-year. But what you’ve seen is a lot of volatility that we experienced in ’21, ’22, ’23 within the bond market, which is shown by the move index, which is the VIX indicator for Treasury bonds and the volatility of that market, has been very muted. You’ve seen it move back down to some of the lowest levels we’ve seen in the last several years.

And so, bond market volatility being lower, I think, is a positive for markets in general. A steeper curve is positive for markets in general, especially some of the more cyclical sides, bank lending and things to that extent, which you’re seeing some upticks. You’ve got credit spreads that have been very resilient, they’re at lows or darn-near lows of the cycle, and even looking at all-time levels. And I think that continues to show that we’re not seeing credit spreads signal any type of economic degradation or concerns.

And so, that’s really another positive, as we look into next year, as we continue to see this play out. And we’re all hopeful that we start to see, like Dave alluded to on the private side, that banks really step in to start lending more and more, with a steeper curve, as they’re more incentivized to borrow short and lend long with a steeper yield curve, and the benefits that that has on the private side of the economy. So again, looking ahead, I think we’ve seen generally a positive reaction from bond markets and how the Fed has cut their policy rate, and it’s been much better received than the faith and the efforts that our government has had.

And so, I think as we look at some of the fiscal policy side of the equation, this shows the federal deficit as a percentage of GDP. If you look at the far-right side, you can see that we’re running in the red, the deficit to GDP has been in the 5% to 7% range. But if you look at the CBO’s projection, which is the Congressional Budget Office, which is supposedly non-political, but whatever, you can say that they’re expecting deficits to continue running at heightened levels for a long time into the future. I don’t think it goes below a projection for less than a 5% budget deficit over the next 10 years. And policies such as the One Big Beautiful Bill, whether it’s on the corporate side with tax cuts and incentives for reshoring, or the consumer with tax cuts, it’s icing on the cake to finish this out.

And I think another thing showing on the next graphic is just the government’s involvement in the economy. When you look at fiscal spending effects, you look at the federal spending as a percentage of GDP, the government’s almost a quarter of GDP as far as their spending into the economy. And I think what that does at the simplest level is it takes out a lot of the cyclicality of market environments that maybe we were used to seeing before because the government is a non-cyclical spender, they’re going to spend whether things are good or other times are bad. And so, as we see this continue to play its way into the backdrop, it’s an important indicator for a lot of maybe smoothing out of some of the data that we see, and probably in a positive way for markets.

JD

Yeah. And just to clarify the point on the last slide, the deficit spend is the hurdle rate, what we’re saying is for your clients to have real purchasing power protected, what do you have to earn on your invested capital, we think a pretty good proxy is the deficit spend. So if the deficit spend’s six, seven, eight, if you’re not earning six, seven or eight or higher, your purchasing power’s being confiscated.

John Luke

Yep. And the government’s telling us that straight-up, with Scott Bessent’s focus on growing the nominal economy, nominal GDP, greater than interest rates. And so, I think that’s-

JD

Trump said, “Why not 20% GDP growth?” JL.

John Luke

I saw that, that was pretty funny. I guess from a levered real estate guy, why not? Just devalue the debt as fast as possible.

So I think the last point for this portion of the bond market update, so this graphic looks at basically the outlays for interest expense, how much of the tax revenues are going to pay interest expense for our country, and then the red line is looking at Treasury yields. So what we’ve talked about a lot the last couple of years is you’ve seen a massive uptick in T-bill issuance, so short-term debt issuance by the government, and we’ve turned into a floating rate borrower in a sense. There was a lot of demand there, the government didn’t want to go longer duration, because putting a lot of supply of long duration bonds into the market when there’s a lot of volatility would probably need a higher rate in order for the market to take them.

And so, the focus here is, as we had an effect or impact on the interest expense, as interest rates went up, where the cost to carry that debt was very expensive, I think that you have the same, if not an even greater magnitude of impact as rates move lower. And so, just to run some simple numbers on it, you’re talking about $200 to $300 billion less of interest expense, based on the amount of Fed cuts that we’ve seen thus far for next year’s budget. And so, when you go back and think about what the government spends money on, the quickest thing that they can bring lower and the easiest is cut rates so that our interest expense is lower. And so, I think that’s going to have another stimulative effect on markets into next year, because not only does the government feel that effect, but also, the consumer does as well.

Dave

More stimulus to your point there, John Luke. We have another poll question coming up right now. What is your favorite asset class heading into the year 2026, is it going to be the large cap S&P 500, non-tech stocks, foreign stocks, bonds or commodities? So as the group answers there, I’ll poll the panelists. JD, what would your answer be here?

JD

You want my politically correct one or do you want my real one?

Dave

We know that answer.

JD

Out of that group, I’m going stocks, but I feel like you were missing an asset class in there.

Dave

We’ll let someone in the Q&A section of this outlook ask what asset class that was.

Derek

I thought about adding another, digital assets, gold, whatever, but I just lumped it all into more traditional to not dilute it too much.

JD

I’m going stocks. More traditional, I’m going stocks. What about you, Dave?

Dave

S&P. John Luke?

John Luke

I’m surprised you didn’t say small caps, Dave. I think S&P. I love how no one said bonds, so at least someone’s listening.

JD

We’ve got the right audience, JL, we’ve got the right audience.

Dave

I tried not to let my dictation say anything when I said bonds. So as everyone here knows, we want to be psycho about risk assets, we want to be psycho about American assets, and I think when you talk about the equity market, you have to talk about the broadening out of the market. I think that there’s a lot of group think or consensus there that the market is going to broaden out. I actually think that it’s already started to broaden out more so than what people imagine. We’ve just been accustomed to thinking that the Mag-7 has been driving everything in this market. Well, the chart on the top right here shows you that we expanded the Mag-7 to the Super-8 to include Broadcom. But only 50% of those names of the Super-8 are actually outperforming the S&P 500 year-to-date, and the contribution to total return is actually lower than what we’ve seen over the past few years. These Super-8 stocks have driven about 45% of the S&P 500’s just over 17% return year-to-date.

And I would say that the other part, the other 55% that has really driven the market, has actually probably come from the more speculative areas of the market, the lower quality areas of the market. And that’s what this chart on the left-hand side is showing you, that it’s been a divided US market, with tech companies with no revenue or profits, they’re winning, and then it shows the Mag-7. The quality compounders, they’ve kind of been left behind, and that’s what this chart is showing you, that Nasdaq with no revenues, you’re on average up 41%, or unprofitable earnings Nasdaq, you’re up 21%. But if you go to profitable Nasdaq or profitable small caps, they’re only up 3% to 6%. So this market has broadened out. It’s not broadened out to the parts of the market we would want it to broaden out to, the higher quality names, the less speculative names. Hopefully, that happens into the future. And the chart on the right hand side shows you also that the best performing names, since the recent April 8th bottom, they’re not profitable names.

But that goes back to, when will this market broaden out? I think if there’s a North Star for some type of sign for me to look to on what’s going to be that catalyst, it’s going to be earnings. It was consensus heading into 2025 that the market would broaden out, and it really hasn’t happened into the areas we’ve wanted it to, because the expectations of earnings growth, of a confluence between the S&P 500’s earnings growth and the 493 or small caps’ earning growth, it just hasn’t hit a crossroads just yet. In a way, that can has continued to get kicked down the road of when there’s going to be that convergence between S&P 500 growth and the average stock. Right now, it looks like small caps, they’re going to converge on S&P 500 growth about two quarters sooner than what the average remaining 493 of the S&P 500 stocks will occur. It looks like Q3 2026 for the 493 and Q1 2026 for small caps to hit that Bone Thugs-N-Harmony, that crossroads there in the future. But again, that continues to get kicked down the road.

For that baton of leadership to get passed, I think we’re going to have to see tangible growth from these parts of the market for them to finally get rewarded. I understand that the 493, on a valuation perspective, is much cheaper than the S&P 500. It’s probably about five turns cheaper right now on a next-12-month PE basis, so that’s slightly a little bit of a larger mean reversion gap than what we’ve been accustomed to. But as y’all heard with our 2025 outlook and a lot of our large cap commentary, a lot of these small cap companies, these remaining 493 companies, they don’t have that core tenet of operating leverage at the core of what they do, like the Magnificent-7 does. So maybe there’s just been a re-rating, where the Mag-7 and mid-cap tech stocks are going to get a slightly higher premium than the average stock moving forward, and that’s why I really want to focus on earnings growth being the catalyst to having this market broaden out a little bit more.

We have a lot of important topics that we can talk about here, but I do want to open it up for questions. We can talk about AI bubble, we can talk about tariff thoughts, we can talk about really anything y’all want. But I thought 11:45 would be a great time to open up anything for questions, so I’ll pass it back to Derek to take hold of that.

JD

D Hern, that first one that popped in, I’ve got a couple of words on that. Good with that?

Derek

Yeah, fire away.

JD

All right. Real quick, so the question, I don’t know if y’all can see these questions or not, but, “Can we talk about future debt and unfunded liabilities and deficit spending cumulatively? By 2035, it seems something has to give, a combination of higher taxes and less government spending.” JL, I’m sure you have some thoughts, but the thing that has to give is our currency, that is the default option. We would agree, we’re not in a great position with the debts, the deficits. And again, the bigger the deficits, the more debt you need. It’s a vicious cycle of more and more and more. Look at our spending, our interest expense, I believe, is our second-largest item outside of Social Security, which that’s not a great thing. If it’s not our second, it’s really close.

So Jim, the simple answer is, what are you going to do? They’re going to do what they always have done for the last 50 years, which is we’re going to sacrifice the currency so we don’t have to sacrifice the bond market, that is what I believe is what has to give. And how long can it continue? I think it can continue for longer than you would think, which, again, all of that feeds into what we’ve already said, own risk assets.

John Luke

Tax receipts are so geared towards risk-asset prices, and I think that when you put that in a perspective of what does it mean, well, the government needs to keep risk asset prices elevated so that they can keep tax receipts elevated to help pay for a number of these line items.

JD

Yeah. And we’re not saying that the market can’t go down. The market obviously can have periods. We’re saying the market can’t stay down, because we are, to reiterate what John Luke said, and I know I get pointed at a lot for being super bullish… I’m just bullish on risk assets. That doesn’t necessarily mean real returns are going to be super great. But if your tax receipts, the way our government is… Think of it as a business. The incoming money for our business of a government is tax receipts, and right now, we need higher prices, we need higher equity prices continually to help offset some of the deficit spend and everything else. And if we enter some real 30%, 40% correction and stay down there, the deficit spend goes absolutely through the roof, so I just don’t think they’ll allow that to happen, or they’ll do everything in their power to not.

John Luke

Yeah. And one more question came in, which keeps on that topic, and it’s, “If you sacrifice the US currency, outside of the PPP,” which is our purchase protection sleeve that we talked about earlier this year, “might there be a raise to the bottom on currencies? If the US goes first, it seems that non-US stocks could outperform.” I guess my answer on that would be I think all governments are using the same playbook, and so it’s just a matter of which currency debases the fastest. But if you look at the spending backdrop on other countries, I think it’s heightened. Just, for instance, Germany this year, with the expansion of their fiscal spend on the defense industry. And so, I would bet that a lot of countries look at what the US did the last five years on the fiscal and deficit side and see how it worked for risk asset prices, and they scratch their head and say, “Well, why aren’t we doing this as well?”

JD

Yeah, and as bad as-

Dave

That’s one of my favorite lines-

JD

Go ahead, Dave.

Dave

Go for it. No, no, no, take it.

JD

I was going to say, I know that we sound super bearish, which makes us super bullish, or you could say the other way, we sound super bullish, but the dollar, for however long, out of the 160 currencies out there in the world, it’s been the best currency. We’re not necessarily saying that changes, we’re just saying that, to John Luke’s point, this is the playbook for anybody with a fiat-based system.

Dave

That’s the best comment out there too that John Luke made there. I don’t know if you made it, John Luke, or Brad or JD, all currencies are being debased, it’s just they’re being debased at different speeds. But I love our US Treasury Secretary, Scott Bessent, it’s a percent Treasury out there, and whether you look at the Stablecoins Act or the GENIUS Act, a few other acts, he’s trying to do anything and everything possible to create more demand for treasury buying, which should create a slowing of the weakening of the US dollar relative to a lot of other people out there, which is another one of our thesis why we want to be psycho about American risk assets.

Derek

There’s more in there… Go ahead.

John Luke

Dave, you want to start with any commentary on oil prices in the market? I know that’s been maybe one of the ugliest asset classes here to-date.

Dave

Yeah. We don’t have our head of privates on here, Joseph Sykora, he used to run a little PEA shop in some of the basins of Texas who could give you a better answer. But high-level, obviously oil has been a very difficult commodity to own, not just over the past year, but just a little bit over that right now. Obviously, there’s a benefit to lower oil prices, especially for the consumer, it frees up capital to drive more spending in the overall economy. But if there was an outlook on oil, I’ve read a lot of outlooks showing that, “Hey, you know what? Oil could probably get down to 55, maybe down to 50.” It’s currently trading right around that $60 Mendoza line.

But there gets a point… Obviously, there’s the gamification of what’s going on with OPEC, OPEC+, and some of the stuff that we’re doing here to be more productive on the US soil side, but there’s going to be some capacity constraints moving forward that we have brought down over the past two years where we’re going to have to bring some more stuff online to meet demand. So a lot of stuff you’ve read is that oil can get more interesting towards, I think it’s April, May or June of next year, where you finally get that supply-demand imbalance to be more bullish on oil prices.

John Luke

I think it’s got to be a self-correcting asset class, in a sense, where low prices create less supply, and less supply drives prices back to a level that makes sense for these companies to produce more oil. There’s definitely some deregulation that’s going on to help spun that were it to come into the future. But lower gas prices in general are, in the short-term, positive for the consumer, for sure.

Dave

We have another question coming in, and let’s tag team it, JL, JD. “Do you see a legitimate case where international securities can significantly outperform again in 2026?” I would say two points there. As I mentioned earlier on the call, legitimately, all the relative outperformance of international stocks versus domestic stocks year-to-date has come from currency translation. In fact, if we go back to a chart closer towards the top, it shows you the breakdown of where total return has come from from international stocks and also US stocks, and the international stocks are going to be on the left side of this chart, and the green bar is showing valuation re-rating and the blue is showing… This doesn’t show currency translation. But a lot of the boost in international interest has come from currency translation, and it’s tough to see the US dollar depreciating another 10%, 15% next year to where they can get the same boost for that relative outperformance next year.

John Luke mentioned, obviously, one of the biggest economies on the international market, Germany, before, and how they’re going to start to re-up some of their overall spending on the defense side. That hasn’t come to fruition. But a lot of these expectations that these countries were going to spend more on the fiscal side allowed them to have some type of increase in their valuation re-rating. We know valuation, historically, international traded at an 8% discount to the S&P 500. Heading into 2025 is about a 50% discount. We know valuation swings too far either way on the downside and upside. So you had a valuation re-rating from a 50% discount versus the S&P 500 to just a 30%, so now it’s in parity with US small caps.

But I would end by saying if we were going to be wrong here on international securities, where they would outperform moving into next year, two things would have to happen. You’d have to see the fruition of earnings and actual growth come to fruition, because that’s what the valuation is playing. Or two, that if you look at this chart on the fiscal policy side, on the left-hand side, all these countries outside the United States have recognized the playbook of what the US has done from a fiscal and monetary standpoint, where they try to mimic and mirror what we’ve done from a fiscal spending side. So you’ve seen a lot more of these countries utilize fiscal engineering to inject more liquidity in their markets, obviously benefiting risk assets. I think you would need those two things, so actual growth and more use of fiscal powers on these international countries, for them to significantly outperform again in 2026.

JD

Yeah. And Derek, I’d wrap us with this kind of… The final thought is we believe risk assets, the delta between, the difference between risk assets and, quote-unquote, “safe” assets will continue, especially from a real return standpoint, will be wide moving into the future. Therefore, your asset allocation decisions really matter, and can you avoid the bond allocations in favor of something else, and then in comes volatility, where, as a business, we believe there’s better risk to absorb in portfolios through the harnessing of volatility. Both you can do things on the short side of it, and what we love is doing things on the long side of it, meaning we benefit from when volatility rears its head.

VIX is at 16 right now. We are incredible advocates for I would rather own something that gives me a known correlation when I need protection the most, a negative correlation, but a known correlation, when I need it the most, because it frees my portfolio up to own more risk. And that’s where, if you look at what we’re going to be releasing in 2026, we’re 12 years old, and I feel like we started in November with what our product roadmap looks like. So I think we’ve done some things well, I think we’re going to do more things well moving into the future. And this whole concept of if risk assets are going to be the area to produce real returns, how can we create strategies and solutions and messaging and content to

allow that to really be expressed in portfolios, and the 2026 year is going to be different for Aptus on that front.

Derek:

Awesome. Want to be respectful of everyone’s time, people might have calls at the top of the hour, so that was good, 56 minutes. Appreciate y’all coming on, and JD, JL, Dave, thanks for putting us all together and making the time for it.

JD

Thank you, guys.

Derek

Wishing everyone a Merry Christmas and we will send this out.

John Luke

God bless. Merry Christmas.

JD

Perfect. Thanks everybody for being here.