Wild Start to the Year – Longer Recap: A narrow rally in the first few weeks, then punishing weakness in February/March (led by Tech) as global allocators moved investments outside the U.S., then “Liberation Day” collapse of all risk assets globally, followed by a rapid recovery led by tech stocks recovering all “Liberation Day” losses, before finally some fear again getting priced into the market as the U.S. debates continue around the “One, Big, Beautiful Bill” and tariffs and de-regulation (Treasury Secretary Bessent’s three-legged stool), making the combined impact on the U.S. government budget and economy incredibly difficult to determine. Equity and bond markets assumed near recession in early April, followed by overheating risk by mid-May. Uncertainty is likely to reign until at least July/August, when 90-day tariff reprieves end and the One Big, Beautiful Bill is signed into law. Meanwhile, hard economic data continues to chug along, and earnings remain resilient.

Long-End Rates Came Back Under the Microscope: With the combination of Moody’s US sovereign downgrade and the passage of President Trump’s “One, Big, Beautiful” bill through the U.S. House of Representatives, long-end rates came back into focus. The market is worried that the bill would increase public debt over the next decade and the ever-so-important debt-to-GDP ratio. Whilst markets in the post-GFC (2009-19) period were defined by monetary policy, since 2020, fiscal policy has been the dominant policy lever. Investors should note that US fiscal spending is up 50% in the COVID era. But U.S. GDP is also about 50% larger (and the stock market has nearly doubled). In fact, the debt-to-GDP ratio today is lower than it was at the end of 2020. Nonetheless, the U.S. fiscal picture remains negative as entitlement spending continues to climb and the U.S. debt servicing cost remains elevated at 18% of tax revenues, exceeding the historical level of 14% when fiscal austerity kicks in.

An Update on the D.C. Administration: Trump is following the opposite order of operations of his first term, when he focused on deregulation and enacting tax cuts before engaging in a modest trade war targeting China. In his second term, he is imposing broad tariffs, including a 10% universal tariff on nearly every country and 25% sectoral tariffs, which raised the odds of a recession and halted business activity before Trump began to walk them back. Congress is moving forward on a tax bill that will provide tax relief for consumers in 2026 and tax cuts for businesses to encourage investment. The House passed its version in late May. Now it moves to the Senate. If the bill is enacted by July 4, before higher tariffs may take effect, that would be a positive and help to sterilize the tariff impact for consumers and businesses. Nevertheless, additional sectoral tariffs remain a risk going forward.

One, Big, Beautiful Bill: With the “One, Big, Beautiful Bill” having passed the House and on its way to the Senate, the market may start looking towards the overall ramifications. Given the interest rate market, it seems like the market is digesting this as if the tax cuts are a bit larger and a bit more front-loaded than expected, and the spending cuts a bit more back-loaded, making the bill more fiscally stimulative in the short-term than expected. Obviously, there is some bickering from both the Right and the Left. From the Right, the primary criticism is that Congress did not further the DOGE mission. This is not an austerity budget, which is what they wanted. On the Left, most of the criticism is the size of the cuts in social spending. There is also some criticism of tax cuts contributing to the deficit, but this is not gaining much traction, probably because almost all of the tax cuts are simply an extension of the current rate, and most people understand a continuation of the status quo is not really making things worse.

Earnings Season Update – Q1 2025: Overall, earnings had a party this past quarter – 78% of companies beat, which is much higher than the historical average. If you remember, heading into this earnings season, the market was pricing in ~8% year-over-year (“YoY”) growth. It came in at 14.0%, led by strong revenues. The critics would say that attention needs to be turning to the second quarter, where the impact of tariffs is expected to play a more significant role. Our thesis for this quarter and (likely) the next few would be that the AI narrative and the capital expenditures (“CapEx”) will continue to drive earnings. While the durability of this trend came under scrutiny at the start of earnings season, the largest companies have shown little indication of scaling back investment. Remember, the Magnificent Seven (“Mag 7”), which are basically tech-proxies and directly tied to the AI-movement, equate to 31.4% of the S&P 500. Said another way, a lot of the contribution to earnings for the S&P 500 seems quite stable.

Politics and Markets: The market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns or DEI initiatives. The market only cares about policies that:

• • Increase (or decrease) earnings, and
  • Support growth (or hinder it).

Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years), and this will help us cut through the noise and stay focused on the policies that will impact markets.

S&P 500 EPS: ’25 (Exp.) EPS = $264.00 (+7.7%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%). 2021 = $204.*

Valuations: S&P 500 Fwd. P/E (NTM): 21.6x, EAFE: 15.2x, EM: 12. 2x, R1V: 17.1x, and R1G: 27.4x. *

*Source: Bloomberg and FactSet, Data as of 5/31/25

Disclosures

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.

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. Forward-looking statements cannot be guaranteed.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Nasdaq Composite Index measures all Nasdaq domestic and international-based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2406-10.

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1. Now that the “One, Big Beautiful Bill” has passed the House and is on its way to the Senate, I’ll start shifting some Musing focus over the next few weeks to the overall bill and the potential market & spending ramifications. As the bill goes through reconciliation, I’ll be pretty quiet until there is some tangible output, as the overall physique of the bill will ultimately change (especially with this week’s tariff news).

For now, I would say that the tax cuts are a bit larger and a bit more front loaded than expected, and the spending cuts a bit more back loaded, making the bill more fiscally stimulative in the short-term than expected. Obviously, there is some bickering from both the Right and the Left. From the Right, the primary criticism is that Congress did not further the DOGE mission. This is not an austerity budget, which is what they wanted. On the Left, most of the criticism is the size of the cuts in social spending. There is also some criticism of tax cuts contributing to the deficit, but this is not gaining much traction, probably because almost all the tax cuts are simply an extension of the current rate, and, in my opinion, most people understand a continuation of the status quo is not really making things worse.

2. While the tariff news is positive from a stock standpoint, the tariff drama is far from over for several reasons. The administration has already appealed the decision, and a path to the Supreme Court seems likely. Additionally, the ruling didn’t say the President can’t implement these tariffs; it just said that using IEEPA to justify them is invalid. Point being, look for the administration to try other avenues to justify the tariffs or to increase non-tariff trade pressure. All-in-all, trade negotiations are likely to become more difficult in the short run, given that trade partners have less pressure to cut a deal.

What Happens from Here? There is a slew of other methods where Trump can reimpose tariffs. Those means would be: 1) along the lines of Section 338 of the 1930 Tariff Act, which would allow for up to a 50% tariff rate (this is the likely route), and/or 2) the Balance of Payments authority allows for Trump to impose tariffs on countries with large trade deficits but limits the rate to 15%, the authority is temporary as well and gives just 150 days before Congress votes on the measure. They’d likely not pass this, but it buys Trump and his team time to find another workaround.

This is What I’m Focusing On Tariff revenue is growing at a pace of $190B annually from Trump’s new tariffs. Including tariffs over a 10-year window is roughly equal to the 10-year cost of the tax bill. If these tariffs are removed and not replaced through other means, the US deficit will be larger than would otherwise be the case. I believe the tariffs will be reimposed through other methods, but the bias is another headwind for long-term bond yields in the short run.

Onward and upward.

Q1 2025 Earnings Recap

Overall, earnings had a party this past quarter – 78% of companies beat, which is much higher than the historical average. If you remember, heading into this earnings season, the market was pricing in ~8% year-over-year (“YoY”) growth. It came in at 14.0%, led by strong revenues. The critics would say that attention needs to turn to the second quarter, where the impact of tariffs is expected to play a more significant role.

Our thesis for this quarter and (likely) the next few would be that the AI narrative and the capital expenditures (“CapEx”) will continue to drive earnings. While the durability of this trend came under scrutiny at the start of earnings season, the largest companies have shown little indication of scaling back investment. Remember, the Magnificent Seven (“Mag 7”), which are basically tech-proxies and directly tied to the AI-movement, equate to 31.4% of the S&P 500. Said another way, a lot of the contribution to earnings for the S&P 500 seems quite stable.

For Brad Rapking, me, and the rest of the equity team, this was one of the more mentally draining earnings seasons as there was a ton of dispersion (cue UNH – if you need commentary here or on any stock, let me know). But I’d state, anecdotally, that there was an overall positive slant. The largest amount of dispersion was in the consumer areas of the market – no surprise there.

But things are not so challenging that we are seeing a coordinated slowdown, nor are we in an environment where the soft consumer sentiment numbers are hindering market share winners from continuing to win. I’d argue on the net, consumer earnings season has been better than expected, with some really good prints in a choppy macro. While there are certainly some challenging areas, trends have seemingly improved at least somewhat into April/May. And there’s no better verbiage than from the Visa earnings call – the CEO basically said that the strong spending environment has continued into April and May.

The chart below shows Year over Year (YoY) S&P 500 forecasted earnings growth by quarter. These series use Wall Street analysts’ median estimates before a company reports, replacing them with actual results once available. The series starts with 500 estimates and ends when all 500 companies have reported. The chart shows that Q1 2025 earnings (blue) are expected to grow by 12.98%. Note Q2 forecasts, in orange, are being revised sharply lower as companies provide their assessments of what tariffs mean for their bottom lines.

Data as of 05.12.2025

And, solely because of Q2 expectations, the overall 2025 earnings estimates have come down from their peak of $277 to $263 (-5.05%). Though I must state that it is still an increase of +9.6% from 2024 earnings, which is right in line with historical averages.

However, to keep things in perspective, as of today (this may not hold true in the future), it feels like the 20% correction that the market witnessed from 2/19/2025 – 4/8/2025 was overdone, given the de minimis decline in EPS estimates. I am knocking on wood as I type this, but we’ll see where the hard data goes from here.

If the consumer remains strong and spends like they have been, it’s tough for the market to get completely into trouble.

At the end of the day, I can’t say this enough: ignore soft data! This morning’s PCE data continues to show strength in consumer spending –> consumer spending is sustaining at 5%+ YoY despite soft data and this is no change in any trend. Although soft data is apocalyptic, you could build just as good of a case of consumer “overheating” as you could “slowing” right now. As long as consumers have jobs, which they do, it’s difficult for this trend to materially slow down.

Source: Raymond James as of 05.30.2025

Stay nimble.

Disclosures

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

Projections or other forward-looking statements regarding future financial performance of markets are only predictions and actual events or results may differ materially.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2505-24.

The post Aptus Musings: Q1 2025 Earnings Recap appeared first on Aptus Capital Advisors.

This should bring down tariff revenue by $300B, bringing the “static” tariffs down to only $260B. This should be viewed as a de-escalation and a new floor. We’ve seen where the pain points are, as the US is worried about empty shelves and small business layoffs. China is worried about a significant collapse in its economy.

Right now, we are seeing the U.S. outperform international securities over this news; we’ll see if this is enough to buck the trend of International > Domestic.

Let’s begin.

The Great International Debate

Almost every single day it feels like we’ve been asked about our positioning in the international space. Like most allocators, there has been a structural underweight to this asset class for years. But, many investors now are calling into question the “U.S. Exceptionalism” and have started increasing their International allocation. Personally, I’m not buying into all of this hoopla, as much of the move has been valuation and currency-based. I would say that our off-the-shelf models, coined the Impact Series, do have a structural underweight relative to the index. Yet, I think we need to think about this in two ways, 1) on a relative- and 2) on an absolute basis.

On a relative basis, we are underweight the benchmark to International as a percentage of equity. But our philosophy of more stocks, less bonds, while remaining risk-neutral, skews this figure. For example, our “Moderate” allocation owns 75% stocks, but maintains a 60%/40%-like standard deviation; you can see all the information on page 31 in our Asset Allocation slide deck (send us an email if you’re interested in viewing). On an absolute basis, we aren’t wildly underweight to the overall exposure of the benchmark.

Everyone knows Aptus’ Yield + Growth Framework, but when it comes to International securities, there is a fourth element: currency translation. More simply, a strengthening dollar hurts International returns, while a weakening dollar helps.

Year-to-date (YTD), the majority of the relative outperformance for International has come from the latter two: Valuation Change and Currency Effects. YTD, the MSCI EAFE has outperformed the S&P 500 by 14.82%. Currency has driven 43% of the relative outperformance, while valuation change (International’s multiple increasing + US decreasing) has contributed the remaining 57%. Now, let’s walk through each factor:

Currency

I’m not sure that one can confidently say that currency effects are mean-reverting, but they tend to oscillate over longer periods of time. Aptus’ house view is that all currencies are depreciating, just some are depreciating faster than others. This makes directional currency calls very difficult, almost impossible. And given the USD’s move has been pretty substantial already this year, I’m not sure that investors can continue to count on this variable as a tailwind for International securities. Playing currency should not be an investment thesis on the asset class.

Valuation Expansion

The S&P 500’s valuation has declined, while the MSCI EAFE’s valuation multiple has expanded. This is the market saying that it is attempting to price in more International growth – for example, Germany has a debt to GDP ratio of 71%, and the market believes that it can use fiscal policy to engineer more growth, specifically in the defense sector. This “Hopes and Dreams” valuation is counting on more International growth in the future, and if it doesn’t happen, the valuation could be at risk.

Since the big question is where the growth will come from, let’s dig in deeper to try to answer this question. In a nutshell, capital has come out of the U.S. and chased foreign returns for two reasons:

1. There is too much market concentration in the U.S., and
2. International should witness positive earnings revisions, driving higher-than-expected sales and earnings growth.

I’ve been speaking at a bunch of conferences over the last month, and a common investment theme is that the U.S. is too concentrated (from a weighting perspective) and that it tends to presage better returns for areas of the market that have more breadth, i.e., International, Small Caps and the S&P 493. Said another way, there is too much concentration in the market, and the concentrated areas are overvalued. But, if you read our 2025 Market Outlook, you’d know that we aren’t perma-bears hating on the Index construction; rather, we believe that it’s a reason to be more optimistic than pessimistic. And to take it a step further, the U.S. isn’t really that concentrated relative to the rest of the world.

MSCI Country Weight

As an investor, you have to know and understand what you own to have conviction in an idea instead of just chasing performance. I understand that at the 10,000-foot view, the MSCI doesn’t have concentration issues because it’s a diversified index of countries, but I would say that each of these countries has its own concentration issues. Yes, International securities are substantially undervalued relative to their past, at the index level, but I think there has simply been a re-rating due to growth concerns.

If we take the most heavily-weighted countries in the MSCI EAFE, which account for over two-thirds of the index weighting, and look at what their concentration is and the growth is, it’s not that exciting.

Every country except Japan has worse concentration issues than the U.S., but all have lower growth rates and operating margins. Then, if you take it a step further and look at the holdings that comprise each country, you’ll notice that, like the U.S., there is concentration in securities, but these concentrated holdings are also highly valued. For example, SAP in the DAX index is almost a 15% weighting that sports a 40x forward P/E and a growth rate of 4% – and this isn’t the only example within the aforementioned country indices.

This shows that many of these countries are top-heavy in weighting and are also highly valued. Yet, the MSCI Index is trading at historically low valuations, on an absolute basis, but also on a relative basis to the U.S. We’ve known that International tends to trade at an 8% discount to the S&P 500, but now trades closer to a 40% discount. If International is also very top heavy on weighting and valuation, that just means that the rest of the companies that fill out the index (i.e., not in the Top 5) are very low quality— which scares me —because to get that low of a valuation, at the benchmark level, that means that the remaining stocks are so very cheap and they’re probably cheap for a reason.

Pound-for-pound, you get more growth and higher profitability in the U.S. per unit of valuation.

Overall

This leads to the biggest question that we should be asking ourselves: “How underweight do we want to be?”, not “Do we want to go overweight International”?

We all know the diversification benefits of International, and we are seeing it this year, so it merits a spot in an overall allocation. But just how large of a spot? Because I don’t think that global investors will suddenly stop seeking out superior US profitability. And the above charts prove that the U.S. has better growth and profitability for a valuation not that widely higher than what headline data tends to skew. As I’ve said multiple times, in my opinion, the profitability aspect of the U.S. is one of the biggest reasons to be optimistic about the U.S. over International.

One of the hardest decisions that portfolio managers and allocators have to make is when to change their opinion on a certain investment subject. This decision gets even more difficult when trying to recognize if there is a seismic shift in a certain theme that’s lasted for over a decade, and that’s what we are now witnessing.

There’s been a ton of head fakes on this trade, and only time will tell if this is another one. But, at the end of the day, the most important thing that we should be doing is making sure that we have a plan in place to monitor this position and what tangible data would make us change our current allocation…Objective > Subjective. And for us to become more constructive on foreign stocks, we need to see tangible growth out of some of the larger countries. Until that happens, I think the easy money of this trade has happened, given that all the relative outperformance has come from valuation expansion and currency translation.

Now, I could be wrong here, but I’m willing to miss out on the first few innings of a trade that has historically produced a lot of head fakes until I am able to make sure that it is an actual seismic shift away from the U.S.

Stay nimble and not too Bullish, not too Bearish.

Disclosures

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

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2505-12.

The post Aptus Musings: The Great International Debate appeared first on Aptus Capital Advisors.

Tariffs → Uncertainty Remains: The rules of engagement have officially been announced, but that does not mean that this will create certainty in the market. The focus turns to the downstream effects, from a sentiment perspective on what will happen to consumers’ spending habits. The base is a 10% tariff on all imported goods. Originally, the aim was to address trade imbalances. Outside of spending, the other big question is whether the more business-friendly policies, i.e., taxes and deregulation, will be able to trump the effects of tariffs in the near term. It would be a mistake to think the tariffs announced on April 2nd will not affect the US economy. The 2018 tariffs on China (one trade partner, albeit a big one) caused a significant, though short-lived, economic slowdown. This time, the economic impact will be bigger. The inflation impact will be different this time, too. The Commerce Department is right that the 2018 tariffs did not cause significant inflation, but that was at least in part because the US quickly switched from Chinese suppliers for many goods to other international suppliers. But for now, political, emotional, and likely market volatility may remain.

The Root of Market Hesitancy: The single biggest obstacle in the market that remains is uncertainty. Tariff and trade policy is a total unknown and headlines are volatile, major government institutions are being gutted or outright closed, and administration officials are openly acknowledging the possibility of a recession. This cocktail of uncertainty has hit consumer and business confidence, slowing economic momentum. Combine that with elevated earnings and a lot of bullish optimism entering the quarter, and you’ve got the recipe for a correction, which we saw in the S&P 500 during Q1. For now, it seems like earnings season has helped some of these fears.

Earnings Season Update – Q1 2024: The S&P 500 has declined by ~5% year-to-date (“YTD”) and has fully recovered all the losses since the April 2nd tariff announcements, yet consensus S&P 500 EPS estimates for 2025 have only declined by 2% YTD. Analysts expect 2025 S&P 500 EPS to grow by 9%, a lower bar relative to previous quarters and down from an expectation of 11% growth at the start of the year. For 2026, analysts are still calling for 14% growth – a number that hasn’t really changed this year.

Fed Update: The Federal Reserve left rates unchanged in a 4.25%-4.50% range, with the interest rate on reserve balances at 4.4%. In the statement, the Fed noted the economy “continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”. The bottom line is that the Fed left policy unchanged but slowed the pace of Treasury roll-off by 80%. The implication is a significant increase in Fed reinvestment starting in April. The Fed’s new forecast suggests heightened uncertainty this year, with growth expected to be weaker, but inflation is momentarily higher. The Fed updated its projections:

• • Gross Domestic Product: The median GDP forecast was cut from 2.1% to 1.7% this year, from 2.0% to 1.8% next year and from 1.9% to 1.8% in 2027.
  • Core PCE Inflation (The Fed’s Preferred Measure of Inflation): Revised from 2.5% to 2.8% this year; unrevised at 2.2% and 2.0%, respectively, in 2026-27, suggesting the FOMC believes tariffs will cause short-run price increases but no lasting inflation.

Politics and Markets: The market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns or DEI initiatives. The market only cares about policies that:

• • Increase (or decrease) earnings, and
  • Support growth (or hinder it).

Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years), and this will help us cut through the noise and stay focused on the policies that will impact markets.

S&P 500 EPS: ’25 (Exp.) EPS = $264.00 (+7.7%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%). 2021 = $204.*

Valuations: S&P 500 Fwd. P/E (NTM): 20.4x, EAFE: 14.6x, EM: 12.0x, R1V: 16.5x, and R1G: 25.2x.*

*Source: Bloomberg and FactSet, Data as of 4/30/25

Disclosures

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.

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. Forward looking statements cannot be guaranteed.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2505-6.

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• • Since 1995, when small, mid, and large-caps have declined > 20% from their 52-week highs, 40% of the time it has accurately predicted a recession. That means that 60% of the time, the market has incorrectly predicted a recession.
    • • In the 60% of the time that equities decline 20% without a recession, the average returns are 20%-30% over the next twelve months.

• • Depending on if the market witnesses a mild recession or a full-fledged recession, returns can vary. But when a recession is avoided, equity performance is consistently positive.

• • The average S&P 500 performance is down -24% during a peak-to-trough mild recession and 40% in severe recessions.
    • • As of today, 4/21/2025, the 52-week peak-to-trough pull back for the market is:
        • S&P 500: -21.35% (from 2/19/2025)
        • NASDAQ: -25.56% (from 2/19/2025)
        • Russell 2000: -29.73% (from of 11/25/2024)
        • Russell Mid-Cap Index: -23.57% (from 11/25/2024)

From a valuation perspective, I think it’s safe to say that indices tend to seem to trough at mid-teens P/E on trough annual EPS.

I know that I’m writing about 2025 earnings in today’s Musing, but right now, I believe that the market has already priced in a semi-recessionary level of growth degradation in 2025, so it all comes down to 2026 earnings and where it will land. Historically, I’ve told investors that the market tends to focus on the next year’s earnings around June / July, but maybe this year the focus could begin a bit sooner than normal.

At the end of the day, the market is a forward-looking mechanism and tends to bottom long before earnings, the height of unemployment, and most importantly, investors’ emotions. And I think the below chart does a great job illustrating this.

Many investors, when thinking of recessions regarding job losses, think of the magnitude and when job losses start to occur. The above chart looks at the forward monthly returns from peak employment in recessions; both mild (i.e., 1970, 1980, 1990, and 2001) and severe recessions (i.e., 1974, 1982, 2008, and 2020). Said another way, if the market witnesses a “mild” or “average” recession, if you see peak unemployment, that means the market tends to be close to a bottom.

Personally speaking, I believe many of the big-picture growth questions will center around the artificial intelligence (“AI”) narrative. If this investment theme erodes over the next 1-2 years, the recessionary narrative will likely grow. But if investor confidence in AI remains, the P/E multiple of the index may not need to normalize to the levels that it has in the past, remaining high. This could possibly lead to a “milder” recession…or “no” recession.

Only time will tell.

 Q1 2025 Earnings Preview

I would say the only major update since my last musing is that the bond market has now joined in on the volatility. I tend to not look at Twitter for information, as much of it is anecdotal in nature and not helpful at best, but I do like to use it for comedic relief, as a recent tweet said: “seeing the bond guys panic is like seeing your parents cry as a kid. You don’t understand it, but you know it’s bad”. I think that sums up the equity market’s bewilderment over the past month, but again, it doesn’t mean that the world is ending.

Q1 2025 earnings season officially began last week with the banks. Over the next few weeks, investors are hoping for important insight into the evolving outlook for corporate profits and activity, i.e., what will growth be in Q2 2025 and CY 2025? While markets have moved sharply in response to the shifting outlook on trade policy and economic growth, consensus earnings estimates have hardly budged. The S&P 500 has declined by ~12% year-to-date (“YTD”) and by 10% since the April 2nd tariff announcements, yet consensus S&P 500 EPS estimates for 2025 have only declined by just 2% YTD. Analysts expect 2025 S&P 500 EPS to grow by 9%, a lower bar relative to previous quarters and down from an expectation of 11% growth at the start of the year. For 2026, analysts are still calling for 14% growth – a number that hasn’t really changed this year.

Of those revisions, most have been concentrated in Q1 2025 with revisions to consensus quarterly EPS of -4.4% in Q1, -2.4% in Q2, -1.0% in Q3, and +0.9% in Q4. These revisions have been more concentrated within the Energy and Materials sectors, while small-cap stocks appear to have exhibited the largest revisions to earnings since the start of the year, and estimates to companies in the tech-heavy Nasdaq-100 index have barely been revised.

Historically speaking, during recessionary periods, on median, EPS has dropped ~13% going back to World War II. Personally, I’d prefer to look at more recent periods as a north star – since 1970, EPS has had a median drop of ~18%. I also believe that the average is closer to 25%, as the Global Financial Crisis skews this average (hence why I’m using median).

At the end of the day, the direct impact of policy changes is unlikely to be reflected in what is backward-looking Q1 data. While policy uncertainty spiked in Q1, most tariff policies are set to start in the current quarter. So, it’s all about guidance – but will we get any? During this period of uncertainty, we’d expect fewer companies than usual to provide forward guidance to both Q2 and CY 2025 – why would they? It’s only one quarter into the new year and information continues to evolve on a daily basis. Personally, I don’t see this as a reason to be pessimistic. Typically, 20% of companies provide quarter-ahead guidance on earnings calls, while 43% of companies provide calendar-year guidance. In the absence of guidance, investors should monitor sales revisions to gauge the demand outlook and capex revisions to assess the trajectory of corporate investment spending.

Lastly, we’ll see how the market digests these reports. My gut says that investors won’t be overly prescriptive around slight misses – investors know that visibility is low, and it’s a case-by-case basis. What I and the rest of our team will be doing is looking at the relative performance of winners and losers, i.e., who is executing the best amongst peer groups – e.g., Azure v. AWS or Google Search, etc. At the end of the day, we believe investors will continue to put a premium on idiosyncratic growth stories, product lines, and/or margins, so a lot of focus will be on the Magnificent Seven. Like I said in my NVDA musing from a month ago, “global growth is undoubtedly slowing. We believe that this could leave the AI trade as an idiosyncratic area of growth.” What we will learn is the CAPEX spend of these mega-caps companies this earnings season, and if it comes in better-than-anticipated, it could drive flows back to the U.S.

I understand that there are strong feelings out there about where earnings should be, but as of right now, we haven’t seen the weakening soft data transition into hard data. That doesn’t mean that it can’t. I know it’s felt like a full decade since “Liberation Day”, but it’s only been three weeks of substantial policy uncertainty, and in the grand scheme of things, it’s only been three weeks. For those counting at home, there are 52 weeks in a calendar year. So, duration of uncertainty matters. The longer it lasts, the more it can weigh on growth.

Stay nimble.

Disclosures

Past performance is not indicative of future results. This material is not financial or tax 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. Forward looking statements cannot be guaranteed and all calculations may change due to changes in facts and circumstances.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2504-25.

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I’m about to break rule #1 for me, quoting Warren Buffett. I respect him but believe that the charlatans of the Twitter world over-pontificate on him. It’s no secret that there is volatility all around us – market, geopolitical, societal, etc., and while it may be difficult to see how today’s situation resolves itself in a tidy fashion, let’s start with a little bit of optimism. Warren Buffett wrote this in a 2008 annual letter:

“In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.  America has had no shortage of challenges.  Without fail, however, we’ve overcome them. In the face of those obstacles — and many others — the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.”

Just remember, it pays to be a rational optimist. Pessimism about the long-term does not align in any way with a historic worldview. Investors can choose to believe that right now is the beginning of the end, but that is a bet against all of human history and against human nature itself. As has always been the case, progress occurs against an inevitable backdrop of catastrophe. Always has and always will. Invariably, you can always find what you go looking for, and your investment results will probably mimic that worldview.

This old person used to tell me that some days it’s a good day to die, and some days it’s a good day to eat a grand slam breakfast from Denny’s. Luckily, for all of us reading this Musing, it’s the latter. Keep on L-i-v-i-n… Livin’.

Let’s Begin... with an “Executive Summary” because this Musing is long.

 Executive Summary: Perspective in a Noisy World

The recent wave of tariff headlines has added to an already noisy macro backdrop. It’s easy to feel overwhelmed, but it’s worth zooming out. The market is not the economy, and stocks are still businesses — driven by earnings, not emotions. We’re not claiming to be trade experts, and we’re definitely not pretending to know how this all plays out. But we do know markets, and we know how to separate signals from noise. Right now, there’s a lot of noise.

Tariffs are part of the game now, like it or not. And while they could create a short-term drag on sentiment and earnings expectations, we should remember two things:

1. The U.S. economy remains more insulated than others, with only 14% of GDP tied to imports; and

2. Markets and businesses crave certainty. Lack of it can weigh on capex and hiring decisions, but so far, momentum has held up.

The short-term may be bumpy, but long-term impacts are still a mystery. Nobody knows if these tariffs are the end of the world or just the start of negotiations. What matters for investors is not how they feel about trade policy but how they react to it.

To borrow a favorite analogy: tariffs are the spinach. Tax reform, deregulation, and lower energy prices are the dessert. The market’s choking down the spinach now, but the second course could help balance things out. In the meantime, don’t confuse market drawdowns with economic collapse. Don’t let headlines dictate strategy. Stay focused on the long-term. It’s not volatility that breaks compounding, it’s how investors respond to it.

Keep perspective.

 Liberation Day to Obliteration Day

It feels like everyone is now a macroeconomist and global trade expert. I can tell you that I am neither, nor is anyone at Aptus, but I am good at reading/understanding markets, remaining calm, and recognizing what is noise and what is relevant. To be frank, I have zero clue what the optimal solution is, but I always find it interesting when smart people on both sides of the argument have so much conviction in their beliefs and are unwilling to budge. Simply said, there are too many problems that need to be solved, too many moving pieces of changing information, and too many variables at play to have any certainty around an outcome. Remember that certainty tends to lead to suboptimal solutions.

Personally, I think that many assumed that April 2nd would be a clearing event for the market. It likely did the opposite, but negotiations should move quickly from this point in time. Yes, the announced tariffs could be challenged on legality – the following night, alone, the US Senate voted to remove the tariffs, but the House is unlikely to allow this to pass. This just shows that there may be some initial cracks in the Republican party on this topic. But, investors must play the hand of cards that they’ve been dealt, and tariffs are the current bower.

Nonetheless, the rules of engagement have officially been announced, but that does not mean that this will create certainty in the market. The focus now turns to the downstream effects from a sentiment perspective on what will happen to consumers’ spending habits. The base is a 10% tariff on all imported goods (goes into effect on April 5th). Additional tariffs were imposed based on a ratio of the trade gap with individual countries to the total trade with those countries (goes into effect on April 9th). The aim is to address trade imbalances. Outside of spending, the other big question is if the more business-friendly policies, i.e., taxes and deregulation, will be able to trump the effects of tariffs in the near term.

It would be a mistake to think the tariffs announced on April 2nd will not affect the US economy. The 2018 tariffs on China — one trade partner, albeit a big one — caused a significant, though short-lived, economic slowdown. This time, the economic impact will be bigger. The inflation impact will be different this time, too. The Commerce Department is right that the 2018 tariffs did not cause significant inflation, but that was at least in part because the US quickly switched from Chinese suppliers for many goods to other international suppliers. But for now, political, emotional, and likely market volatility may remain.

The genesis of today’s economic angst is trade policy coming out of Washington, but two realities would suggest the U.S. will be far from the economy most acutely impacted.

• • The U.S. is the most insular major economy. Trade makes up 96%, 73%, and 37% of gross domestic product (GDP) for the EU, Mexico, and China, respectively, compared to just 25% for the U.S. Although these countries have varying degrees of reliance on the U.S. specifically, trade disruptions are likely to echo throughout supply chains, impacting those economies most exposed to trade; and

• • The U.S. had the strongest economy coming into this episode. U.S. GDP has grown consistently between 2.5% and 3.5% for the past two years and came into 2025 with solid momentum. Many other economies, including China and many in Europe, appeared fragile even prior to the onset of tariff risks, leaving them more exposed to its impacts.

Let’s keep tariffs in perspective. According to the World Bank, imports of goods and services (% of GDP) in the U.S. were about 14% in 2023. The other 86% is domestic. In other words, Trump’s tariffs are impacting 14% of GDP (directly). If there is some softening, there is a whole other side of our economy that can help support the demand destruction. Then, there’s the potential for deregulation and tax cuts to help insulate the damage.

Lastly, the market is not the economy. While the economy and market live in the same house, they reside on different floors. The S&P 500 sources ~1/3rd of its revenue from international customers, while exports only make up about 13.7% of U.S national income. Said differently, while the market drawdown may be more appropriate for worsening prospects, investors should not assume the recent market is also identically moving in the underlying economy.

Where to Focus

At the end of the day, the name of the game for market returns is all about domestic economic growth.

Short-Term Growth: There could very much be some short-term pain, driven solely by sentiment. Like the market, businesses love certainty. When they make business decisions, they want to have as much certainty as possible as they weigh the risks and the potential rewards of an investment (i.e., capex, hiring, etc.). So, a resetting of EPS expectations is likely coming during the first-quarter reporting season, which could lead to additional downward pressure on equities. Looking at the quarterly estimates, it’s clear that EPS growth has been revised lower for both the first and second quarters, while expectations for the second half of the year have largely remained unchanged –> meaning that the duration of the worst-case scenario is one of the key factors moving forward.

• • Luckily, there has been a great deal of inertia in our economy from a growth perspective. Going back to Q1 2023, 7 of the last 8 quarters have exceeded 2% in real GDP growth, as the S&P 500 continues to outkick its coverage from an earnings perspective.

• • We’re not naïve enough to believe that this heightened uncertainty won’t cause this inertia to slow, but we still don’t have enough information to make a call that the economy will come to a screeching halt.

Long-Term Growth: Who’s to say? Let’s ask some questions:

• • Will the tariffs announced yesterday immediately affect your spending habits?;

• • Are these tariffs considered the “worst case” starting point

• • Will the tariffs cause permanent impairment on US growth and GDP?

• • Is there an opportunity to use tariffs as a revenue aspect to lower taxes and the deficit?

Simply said, we have no idea the answers to all of these questions. It’s an unsolved mystery. Only time will tell, and until the answers show themselves, the rules of engagement are likely to be completely different than today.

John Luke had a great analogy on our quarterly webcast (reach out if you missed). Tariffs are the unwanted policies out of D.C., while tax reform and deregulation are the most desirable policies. If we call the former spinach, then we’ll call the latter dessert. Much like at the dinner table growing up, you don’t get dessert unless you eat your unwanted vegetables. The market is just navigating the first part of this dinner transaction because we need to think holistically – there are two sides to the ledger: spinach and dessert. Said another way, to counter these disruptive economic policies, extending tax cuts, lower energy prices, and lower corp., tax rates will be needed.

Whether one believes the formula used in the tariff’s equation or not, Trump’s ultimate goal was to earn $600B, and the current architecture does just that. With this newfound revenue source, Congress can now have the ability to deliver on large-scale tax cuts to sterilize the negative impact on higher tariff rates. Per Strategas, the government will collect more from tariffs this year than the corporate income tax revenue in total. So, this is very meaningful.

Another byproduct of some of the tariffs is that they could push interest rates lower in the near term. I won’t make any assumptions on the long end, as that’s very complicated, but shorter-term rates will move lower with more rate cut expectations. This will be a direct benefit to the fiscal deficit, as nearly 1/3rd of our debt is coming due in the next twelve months + 54% due in the next three years. Honestly, substantial reshoring from tariff policy in the near term is highly unlikely because policy could change around midterms or in 2028’s presidential election. The market isn’t going to witness TVs to be made in Boring, Oregon. BUT, if yields can come down materially, we can start to refinance our debt on more favorable terms, potentially saving hundreds of billions of dollars.

This is why perspective is key because consumer behavior is simple: investors hate losses and have little patience for Washington D.C. policies that might not immediately contribute positively to stock market returns. We’re just focused on the spinach right now because it tastes horrible. Let’s hope we can finish it to be able to get to the dessert.

Conclusion

It pays to keep one’s eye on the prize, and that’s long-term compounded returns. And old macro wisdom states that economics (and earnings) supersede politics (and geopolitics). Always have and always will.

Investors will rarely know how the market is going to react in the short term; how can anyone read anything we see in the news immediately and infer any LT impact without first questioning whether it’ll actually stick or not anymore? As it relates to the long-term, consider the table below, which simply juxtaposes sector returns under Trump’s first term vs Obama’s two terms:

As you’ll see, despite a very distinct set of policies and philosophies, the top of the leaderboard was very similar, as was the bottom.

I recently read the following market analogy from Andrew Korz and FS Investments:

“Is the stock market a thermostat, or a thermometer? Thermostats control a room’s temperature, while thermometers simply react to it. The market fancied itself a thermostat heading into the second Trump term, believing it could guide the policy temperature by the market reacting positively to policies it liked and negatively to those it didn’t. All presidents care about the stock market – even more so one that presides over an economy in which equity and mutual fund assets comprise 30% of household net worth. Or so the theory went.

Wednesday’s announcement made it clear the market holds less sway over the administration’s policies than previously thought. The stock market has turned out to be more of a thermometer — a reflection of the expected impacts from policy on corporate earnings — than a thermostat, and the recent sell-off demonstrates that. That is not to say the market plays no role in shaping future policy decisions; this is American politics, after all, and there is always another election right around the corner. However, as we sit today, the “Trump put” appears to be set significantly lower than current market levels, a notion that should concern all public equity investors.“

Personally, I don’t have much time for people who criticize tariffs on academia or any other aspect of the trade policy. We invest in the world that we live in, not the one that we want. As investors, we need to play the game with the cards that we’ve been dealt. If you do that, you’ll be much better off than questioning the rules of a game where you are not the puppet master. This is one of the toughest lessons that investors need to learn –> Follow the tape; follow what the market is telling you because at the end of the day, it’s the only arbiter in town.

As always, there will be winners and losers. But remember, the losers could be the previous winners who offshored our jobs and wealth while importing cheap labor before. But the easiest way to lose the long game is to let your emotions get the best of you.

It is not adverse market conditions that derail compounding; it’s investors’ reactions to them.

Allocation Thoughts

Please reach out if you’d like us to review your custom allocations, as we couldn’t be more convicted in how our structure is built for uncertainty, much like what we are seeing today. JD’s monthly note is a great reminder of what we are building at Aptus – read Own the Risk, Hedge the Tail on our Content Hub. 

Our Q1 information packet is live – reach out if you’re interested in viewing Q1 2025 deck, Q1 Webinar, and Q1 Newsletter.

Disclosures

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

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2504-11.

The post Aptus Musings: Perspective in a Noisy World appeared first on Aptus Capital Advisors.

Tariffs → Uncertainty Remains: The rules of engagement have officially been announced, but that does not mean that this will create certainty in the market, as the focus turns to the downstream effects, from a sentiment perspective on what will happen to consumers’ spending habits. The base is a 10% tariff on all imported goods. Additional tariffs were imposed based on a ratio of the trade gap with individual countries to the total trade with those countries. The aim is to address trade imbalances. Outside of spending, the other big question is if the more business-friendly policies, i.e., taxes and deregulation, will be able to trump the effects of tariffs in the near term. It would be a mistake to think the tariffs announced on April 2nd will not affect the US economy. The 2018 tariffs on China — one trade partner, albeit a big one — caused a significant, though short-lived, economic slowdown. This time, the economic impact will be bigger. The inflation impact will be different this time, too. The Commerce Department is right that the 2018 tariffs did not cause significant inflation, but that was at least in part because the US quickly switched from Chinese suppliers for many goods to other international suppliers. But for now, political, emotional, and likely market volatility may remain.

The Root of Market Hesitancy: The single biggest obstacle in the market that remains is uncertainty. Tariff and trade policy is a total unknown, and headlines are volatile, major government institutions (USAID, Department of Education, Consumer Financial Protection Bureau) are being gutted or outright closed, and administration officials are openly acknowledging the possibility of a recession. This cocktail of uncertainty has hit consumer and business confidence, slowing economic momentum. Combine that with elevated earnings and a lot of bullish optimism entering the quarter, and you’ve got the recipe for a correction, which we saw in the S&P 500 during Q1.

Earnings Season Recap – Q4 2024: It was the third straight year that U.S. Large Caps had stronger growth than U.S. Small Caps, but it was much narrower. The final tally was +15% for the S&P 500, while Small and Mid grew by ~5%. Here are our overall thoughts:

• • Outsized investments in capex and R&D have supported the exceptional performance of US stocks during the past decade. In 2025, the Magnificent 7 companies will boost their capex by 31% YoY to $331B. If you simply rewind history back to October, just four months ago, these companies were “only” expected to spend $263B on capex (+13%).

• • The superior earnings growth and returns of the Magnificent 7 relative to the S&P 493 should mathematically continue to narrow. The excess earnings growth of the Magnificent 7 relative to the S&P 493 declined to 19% in Q4, the narrowest gap since Q1 2023.

• • The market has been rewarding backward-looking EPS beats less than usual and punishing misses more than usual. For example, firms that beat EPS estimates outperformed the S&P 500 by just 0.14% the day after reporting (vs. 1.01% historical average), while those that missed underperformed by 2.79% (vs. 2.11% historically).

Fed Update: The Federal Reserve left rates unchanged in a 4.25%-4.50% range, with the interest rate on reserve balances at 4.4%. In the statement, the Fed noted the economy “Continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.” The bottom line is that the Fed left policy unchanged but slowed the pace of Treasury roll-off by 80%. The implication is a significant increase in Fed reinvestment starting in April. The Fed’s new forecast suggests heightened uncertainty this year, with growth expected to be weaker, but inflation is momentarily higher. The Fed updated their projections:

• • Gross Domestic Product: The median GDP forecast was cut from 2.1% to 1.7% this year, from 2.0% to 1.8% next year, and from 1.9% to 1.8% in 2027.

• • Core PCE Inflation (The Fed’s Preferred Measure of Inflation): Revised from 2.5% to 2.8% this year; unrevised at 2.2% and 2.0%, respectively, in 2026-27, suggesting the FOMC believes tariffs will cause short-run price increases but no lasting inflation.

The DOGE Concern Appears to be Overblown: The uncertainty of the impact of DOGE appears to be front and center on the minds of investors – the question surrounds jobs. The numbers are currently small, even though there is a lot of concern showing up in some of the consumer sentiment surveys. It’s worth noting that the actual job losses from this are quite small in magnitude. For example, only 33,150 government employees have been laid off so far in 2025. That compares to the US labor force of 171M.

Politics and Markets: The market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns, or DEI initiatives. The market only cares about policies that:

• • Increase (or decrease) earnings, and

• • Support growth (or hinder it).

Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years), and this will help us cut through the noise and stay focused on the policies that will impact markets.

S&P 500 EPS: ’25 (Exp.) EPS = $268.80 (+9.6%). ‘24 EPS = $245.16 (+11.5%). 2023 = $220 (+8.6%). 2022 = $219 (+0.5%). 2021 = $204.*

Valuations: S&P 500 Fwd. P/E (Next 12 Months): 20.3x, EAFE: 15.9x, EM: 12.0x, R1V: 16.8x, and R1G: 24.8x.*

*Source: Bloomberg and FactSet, Data as of 3/31/25

Disclosures

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.

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. Forward looking statements cannot be guaranteed.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market. To be eligible for inclusion in the Index, the security’s U.S. listing must be exclusively on The Nasdaq Stock Market (unless the security was dually listed on another U.S. market prior to January 1, 2004 and has continuously maintained such listing). The security types eligible for the Index include common stocks, ordinary shares, ADRs, shares of beneficial interest or limited partnership interests and tracking stocks. Security types not included in the Index are closed-end funds, convertible debentures, exchange traded funds, preferred stocks, rights, warrants, units and other derivative securities.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries*around the world, excluding the US and Canada. With 902 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 Emerging Markets (EM) countries*. With 1,387 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Investment-grade Bond (or High-grade Bond) are believed to have a lower risk of default and receive higher ratings by the credit rating agencies. These bonds tend to be issued at lower yields than less creditworthy bonds.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

Nasdaq-100® includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities. ACA-2504-7.

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One of the most infamous, and the only documented unsolved, air piracy cases in the history of aviation was that of D.B. Cooper. A thin, olive-skinned man who pulled off the first and only successful major skyjacking in the United States – one that was mimicked by others for years to come. After buying a plane ticket, day of, to fly from Portland to Seattle, D.B. Cooper handed a flight attendant a note stating that he had a bomb in his briefcase – demanding that he is given $200,000 and four parachutes. After successfully obtaining the ransom, the plane was directed to fly to Mexico. But, before getting to the destination, D.B. Cooper parachuted out the rear stairway, vanishing into a vast wilderness over Southwest Washington. To this day, his whereabouts remain unknown.

Some sleuths believe that the infamous D.B. Cooper immediately died on impact after his parachute failed to deploy. This is very synonymous with the main question being asked by the gumshoes of the market: Will the market rally get derailed early, parachuting into uncertainty, before the proverbial airplane can have a soft landing on a runway that feels like it continues to get shorter?

Before investors “jump” to conclusions on the answer to this question, which will continue to remain unsolved for now, there needs to be a reset in the overall perspective of the market. Keeping perspective is always more advantageous than pontificating outcomes through a crystal ball.

• • Pullbacks are Normal and Healthy: Markets that go straight up without any volatility, much like 2023 and 2024, are the outlier, as those market conditions tend to be abnormal. Markets don’t move in a straight line;

• • All Bear Markets Start with a Correction, But Not all Corrections Turn into Bear Markets: Since World War II, there have been 39 instances where the S&P 500 declined by 10% or more. Only 13 of those events turned into bear markets, where losses exceeded 20% – i.e., only 33% of the time;

• • Sentiment Surrounding the Market is Worse Than During Covid and the Great Financial Crisis: Yet, the market ended Q1 2025 at levels not seen since…September 2024…a mere 6 months ago. The market has officially pulled back by 10.0% in 2025, but during the two aforementioned periods, the peak-to-trough pullback was -33.79% and -54.91%, respectively; and

• • Never Bet Against the Resiliency of Corporate America: Macro news can seem overwhelming, but just remember, it’s all about stocks, which are all about the underlying businesses. The S&P 500 grew earnings by 16% last quarter and continues to expect to grow closer to 11% during Q1 2025.

Perspective is key because consumer behavior is simple: investors hate losses and have little patience for Washington D.C. policies that might not immediately contribute positively to stock market returns.

Like D.B. Cooper, the future of the market will always remain an unsolved mystery. At the end of the day, investors need to focus on what they control and prepare for what they cannot. It is never beneficial to focus on short-term outcomes when investing for the long run. This is why Aptus is firm believers that investing with guardrails is the best way to win the long game, given the bad math of drawdowns. Understanding that drawdowns occur often and immediately recognizing the need to control and manage personal emotions during market drawdowns is the best elixir to efficiently compounding capital over longer periods of time. Remember, it’s one’s time in the market; not timing the market.

If you don’t control your emotions during turbulent periods, you may find yourself needing to hijack a plane for ransom money to conquer longevity risk. Remember, this has only been successfully implemented one time in U.S. history – and that’s if you believe that D.B. Cooper actually parachuted out of the back of an airplane unscathed.

Q1 2025 Market Recap

It may be hard to believe that the market was trading at all-time highs just a mere 6 weeks ago, but then policy hyperactivity started to overshadow the animal spirits. The first quarter of 2025 delivered a classic third-year bull market correction, falling 10% from its highs before rebounding and finishing only -4.28% in the quarter. The recent selloff has been centered around three prevailing culprits: momentum unwind, tariff uncertainty, and a growth slowdown. A key highlight of the quarter was the market broadening that drove the previously unloved International markets higher (+7.03%), as investors rotated from the Magnificent 7 (“Mag 7”) which became a funding mechanism into the cheaper areas of the market. Well, except U.S. Small Caps (-9.51%).

When investors take a step back, it’s stunning how much is going on right now – and, even if implied volatility has settled down, the market continues to digest a huge range of significant variables. The result will likely be a trading environment profoundly different from the past few years. But remember that investors need to invest in the world that we have; not the one that we want.

The single biggest obstacle in the market that remains is uncertainty. The market loves clarity and certainty, and when this characteristic is lacking, it tends to breed volatility. This cocktail of uncertainty has hit consumer and business confidence, that could ultimately slow the current economic momentum. Combine that with elevated earnings and a lot of bullish optimism entering the quarter, and you’ve got the recipe for a correction, which we saw in the S&P 500 during Q1.

Understanding the Drawdown

The root cause of the recent volatility can’t be boiled down to just one thing – it’s likely three. In order of contribution for the 10.0% pullback is: 1) momentum unwind, 2) expectation for slower growth, and 3) policy uncertainty. It may come as a surprise, but capital flows can significantly impact market pricing. In 2025, we’ve seen meaningful outflows from U.S. Mega-Caps into International equities.

1. The Momentum Unwind: The absence of follow-throughs across most major volatility indicators, including oil, interest rates, and both developed and emerging market currencies, suggests that the key driver is likely the momentum unwind. If tariffs were the primary catalyst, we’d expect heightened volatility in currency markets. If growth concerns were at the core, oil and interest rate volatility would be spiking. Instead, the broad lack of volatility confirms what this chart is signaling: a momentum unwind is the dominant force behind the recent market moves.

2. The Growth Slowdown: When comparing historical growth pullbacks, excluding COVID (plus, 2022 was rates-driven, not growth-driven), the drawdown that we are witnessing isn’t uncommon. These previous growth scares have resulted in a drawdown closer to -16.0%. While we aren’t necessarily down as much as average, we would say that the consumers and corporations remain much stronger today compared to these previous periods.

Another way of saying this is that the bond and credit markets don’t seem to be as concerned about as the equity market.

3. Policy Uncertainty: Investors still face two unknowns: 1) the extent and 2) the size of looming tariffs on major trading partners, including Canada, Mexico, the EU, and others. The unpredictable and spontaneous nature of the tariff threats has led investors to worry that even currently well-regarded trade partners aren’t safe from potential threats. Investors need a clear and consistent policy to have more conviction.

Underneath the Hood

In 2024, the Mag 7 drove more than half of the S&P 500’s 25% total return. And, for the most part of the past two years, it has been the driving force behind all of the S&P 500’s earnings growth. But lately, the Mag 7 turned into the Lag 7, as investors began to reconsider stretched valuations and excessive positioning. In fact, almost every single Mag 7 stock either hit correction territory (>20%) or was within spitting distance of it. Historically, the cap-weighted index tends to experience 10% drawdowns in most years, similar to what we’ve seen recently. In contrast, the equal-weighted index, a proxy for the typical stock, has fallen only -7.3% during the recent bout of volatility and remains 8% below its all-time highs.

However, the increasing market breadth has completely eluded U.S. Small Caps, which are down -17.3% from peak-to-trough since its November 2024 highs. They’re off -9.5% year-to-date. Bluntly said, the “R” word, i.e., recession, is a very bad word for Small Caps. Whether it’s regional bank stress, meme stock volatility, or rising rates, something always seems to be holding back small caps over the past few years. With recession concerns resurfacing, small have taken a hit more than you’d typically see in the early stages of a slowdown.

Fundamentally, it’s also been a tough stretch. As of Q1 2025, small cap earnings growth is projected to outpace large caps in the second half of the year. But unless growth reaccelerates meaningfully, that potential leadership shift may never materialize.

One reason investors are eyeing small caps is valuation. They remain historically cheap, trading roughly one standard deviation below large caps for three straight years, making them look attractive if the macro picture improves.

But, if there’s a discussion about increasing market breadth, then investors can’t leave International stocks out of the conversation.

Fire Side Chat: The Great International Debate

In a knee-jerk reaction, it seems that Donald Trump has started to make international equities great again. The theme of US exceptionalism has been as powerful as any – whether an investor starts the clock in 2009 or 2020, the US has been the best game in town. Flash forward to today, some investors are wondering if this narrative has changed, as U.S. underperformed the rest of the world by the largest amount in 23 years during the first quarter.

Nonetheless, the first leg of this rally seems to be more of a capital flows story, as international was substantially under-owned heading into the year. The way this looks in our US equity market is “rotation” or “broadening”, as the global asset managers that we believe have been funding much of the “US exceptionalism” of Mega-caps and winners of the last 2 years are likely rejiggering global weightings at the beginning of this year.  This doesn’t hurt the entire US equity market, but the parts of the equity market that those global assets have moved into the last several years (i.e., mega cap tech). For those that don’t know, capital flows can really move the markets, especially if the money flows from something that has been “over-owned” to something that has been substantially “under-owned”.

To be specific, U.S. equities have underperformed International due to the following reasons:

• • Europe is still lowering rates, even with inflation above 2%, while the US is clearly done until the economy weakens. European economies are very sensitive to the short end of the curve, so economic improvement should be evident very soon;

• • Germany is likely to start allowing EU countries to expand fiscal stimulus in order to increase defense budgets, and start the process of taking the US training wheels off of the European experiment of the last 80 years;

• • At the same time, the U.S. will be cutting the deficit (we’ll see, just a narrative right now), which will create an economic headwind in the US at the same time Europe is expanding. And after 6-7 years of compounded overweighting of US equities, global managers appear to be talking themselves into rotating back into the rest of the world;

• • On top of this, year-over-year (“YoY”) growth is broadening out. For the last 2 years, most equity indexes around the world including the US had modestly down YoY earnings, at the exact same time the Magnificent 7 was putting up 40%+ EPS growth.

• • In essence, the valuation spread between “winners” the last 2 years, and “losers” the last 2 years had gotten very extreme, with the same sectors, styles, factors outperforming and underperforming almost every month for 2 years. This phenomenon is highly unusual. At some point you get some reversion to the mean and it feels that we reached that point at the start of the year.

As fiscal spending shifts from the U.S. to abroad, investors are becoming increasingly excited about the potential for a pick-up in growth. However, in the near term, global market outperformance is likely driven by a re-rating of multiples, fueled by a historically steep discount. Looking back to the last time the international discount relative to the U.S. shrank, we find ourselves in the early to mid-2000s, when China entered the WTO. European companies gained access to a new market, and global ex-U.S. growth outpaced U.S. growth by 3%. Today, however, there is no obvious catalyst that would drive an extended period of outsized growth abroad. While President Trump’s policies are causing some countries to rethink their investment strategies, we suspect the negative headlines will fade over time.

Final Thoughts

We all know that the market experiences three 5%+ pullbacks per year on average. These corrections are healthy and should not be alarming. The data below shows that these pullbacks are common rather than extraordinary. Since 1928, the largest annual drawdown averages -16.0%, yet year-end returns typically remain positive.

The message here is clear: it pays to stay patient, not clever by trying to time the market. Plus, as you see on the right chart, volatility breeds opportunity.

It’s been said that most of the time markets behave quite normally. In fact, this accounts for 85% of the time. During these periods, investing tends to be “easier”. These periods will have little significance to compounding returns over longer periods of time. It’s the other 15% that matters – the periods could be in either direction – elation or terror. How an investor handles these times of euphoria and panic are most important to portfolios. If we are on the precipice of one of these 15% periods, remain calm. As investors, our behavior right now is the most important thing to focus on, as staying invested tends to be one of the most beneficial (in)actions one can do.

Remember, it’s all about perspective. The market was at an all-time high only a few weeks ago and is only off -4.3% year-to-date.

Stay Nimble; Remain Patient.

Disclosures

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

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2504-1.

The post Aptus Q1 2025 Newsletter appeared first on Aptus Capital Advisors.

• • JD Gardner: UNC Wilmington & Wright State
  • John Goldberry: UNC Wilmington & Brose Baskets Bamberg (Germany)
  • Beckham Wyrick:  UNC Wilmington & Brose Baskets Bamberg (Germany)
  • Billy Graham: Wright State
  • Joe King: UNC Wilmington
  • Mike Sefscik: Allegheny College
  • Will Gardner: Samford & Alabama Huntsville

So, why not start off with our team’s March Madness Picks?

If you disagree with someone’s pick, please hit them individually to let your opinion be known! If you disagree with mine, please send all inquiries to Brapking@apt.us.

Let’s get started. I think the word of the month needs to be, “Keeping Perspective“. Perspective on the: 1) Tangible ramifications of tariffs, 2) The reason for the pullback, and 3) The necessity to not mix politics and markets –> They go together like Lamb and Tuna Fish.

Please reach out if you’d like a link to John Luke and I’s webcast last week on the market downturn.

The Market Correction of 2025

The first half of March is in the books and a dizzying stretch to put it lightly. The S&P 500 officially entered correction territory last week as investors digested the economic outlook. The S&P 500 just fell 10.0% in 20 calendar days which is the 5th fastest correction in the last 75 years (fastest ever was 8 days during the onset of Covid – 2/27/20).

Personally, I do not believe that politics and policymakers are the sole reason for the recent 10.0% pullback in the S&P 500. I’m a firm believer that the root of this pullback is slowing growth, while the intra-day volatility has been headline-driven regarding tariffs. Why do I believe this?

• • U.S. Large Caps > U.S Small Caps;

• • Defensive Stocks > Cyclical Stocks (This part is very intriguing, as the latter tends to outperform when rates come down. Rates have fallen from 4.79% to 4.31%. Since this phenomenon is not holding true, it makes me believe that this is more of a growth scare); and

• • The stocks leading this downturn are pretty much impervious to tariffs. These hardest hit stocks have exhibited higher valuation and higher beta. The best analogy that I can use here is one that I learned from my mentor, Len Haussler. During a market pullback that is growth-related, it’s better to have a lower valuation. Think of skiing: when riding down a black diamond slope, I’d rather fall as a 6YO that is 4′ tall rather than a 30YO that is 6′ tall. The taller human falls harder, faster, and tends to get hurt worse, much like valuation.

But, no matter the reason for the pullback, they are healthy and normal. To be quite honest, it’s not normal when the market goes straight up without a pullback.

We all know that the market experiences three 5%+ pullbacks per year on average. These corrections are healthy and should not be alarming. The data below shows that these pullbacks are common rather than extraordinary. Since 1928, the largest annual drawdown averages -16.0%, yet year-end returns typically remain positive. The message here is clear: it pays to stay patient, not reactive. Plus, as you see on the right chart below, volatility breeds opportunity.

Now, don’t get me wrong, there is a set of variables that I’m concerned with. These are objective truths: U.S. growth is slowing, U.S. Fiscal dominance is narrowing, and no investor actually knows how tariff policy will play out. This is why I feel safe saying that the animal spirits provoked by Trump’s victory in November have given way to serious and widespread concerns about a new world economic order. The duration of the current anxieties regarding tariffs could have a significant impact on our future odds of a recession.

To me, it’s simple, it is clear that people hate losses and have little patience for policies that might not contribute positively to stock market returns immediately.

Corrections are a function of price and time – on the price side, we’re likely in the ballpark after -10.0%, but we do wonder if the time consideration lingers in the weeks ahead, especially with the looming April 2nd date. But, if we compare ourselves to historical growth pullbacks, excluding COVID (2022 was rates-driven, not growth-driven), the drawdown isn’t uncommon. These previous growth scares have resulted in a drawdown closer to -16.0%. While we aren’t necessarily down as much as average, I would say that the consumer and corporations remain much stronger today relative to these previous periods. Another way of saying the bond and credit markets don’t seem to be as concerned as the equity market.

Diving into this year’s performance more, investors have been paid to do the opposite of 2024. In fact, the consensus longs in the market (i.e., O/W Small Caps, U/W Duration, and U/W International) have underperformed – likely marking a difficult year for active allocation management.

The above chart looks pretty familiar to the “Volatility Tax” chart that we’ve always spoken about.

The Question on Everyone’s Mind: International v. Domestic Stocks

In a knee-jerk reaction, in my opinion, it seems that Donald Trump has started to make international equities great again. The theme of US exceptionalism has been as powerful as any; whether an investor starts the clock in 2009 or 2020, I believe the US has been the best game in town. Flash forward to today, some investors are wondering if this narrative has changed to the benefit of Europe and China. These are similar stories in a way; both were seriously under-owned coming into the year, but we’d argue they’re fundamentally independent. China caught a bid on the back of Deep Seek, which was amplified by President Xi’s embrace of his national champions. While Europe is not a tech story, it appears to be more of a concession to reality that serious policy changes need to be made on both growth and security.

Nonetheless, the first leg of this rally seems to be more of a capital flows story, as international was substantially under-owned heading into the year. The way this looks in our US equity market is “rotation” or “broadening”, as the global asset managers, that we believe have been funding much of the “US exceptionalism” of megacaps and winners of the last 2 years, are likely rejiggering global weightings at the beginning of this year Which doesn’t hurt the entire US equity market, but only the part of the equity market that those global assets have moved into the last several years (i.e., mega cap tech). For those that don’t know, capital flows can really move the markets, especially if the money flows from something that has been “over-owned”, to something that has been substantially “under-owned”.

To be specific, U.S. equities have underperformed Internationally due to the following reasons:

• Europe is still lowering rates, even with inflation above 2%, while the US is clearly done until the economy weakens. European economies are very sensitive to the short end of the curve, so economic improvement should be evident very soon;

• Germany is likely to start allowing EU countries to expand fiscal stimulus in order to increase defense budgets, and start the process of taking the US training wheels off of the European experiment of the last 80 years;

• At the same time, the U.S. will be cutting the deficit (we’ll see, that’s just a narrative right now), which will create an economic headwind in the US at the same time Europe is expanding. And, after 6-7 years of compounded overweighting of US equities, global managers appear to be talking themselves into rotating back into the rest of the world;

• On top of this, year-over-year (YoY) growth is broadening out. For the last 2 years, most equity indexes around the world including the US had modestly down YoY earnings, at the exact same time the Magnificent 7 was putting up 40%+ EPS growth.

• In essence, the valuation spread between “winners” the last 2 years, and “losers” the last 2 years had gotten very extreme, with the same sectors, styles, factors, outperforming and underperforming almost every month for 2 years. This phenomenon is highly unusual. At some point, you get some reversion to the mean and it feels that we reached that point at the start of the year.

Personally, I would not be chasing International markets here, as the return has been all valuation-driven, and there remains a lot of skepticism on the potential follow through of policy. Secondly, and most importantly, I’m totally fine missing out on the first few innings of a broader-based market rotation into international to make sure that the potential for these structural regime changes becomes tangible.

As always, feel free to reach out with any questions.

Disclosures

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

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2503-19.

The post Aptus Musings: Perspective on the Market Pullback appeared first on Aptus Capital Advisors.

1. Given the recent volatility, if you have any specific holding or portfolio level questions, please don’t hesitate to reach out to us. We are here to help. As many of you know, a few of our strategies are our best expression of owning volatility as an asset class, the S&P 500 had sold off ~6.5% (NASDAQ closer to -10% / Small Caps were -16%) given the headline risk around tariffs. We love how we are positioned.

Historically, the market experiences three 5%+ pullbacks per year on average. These corrections are healthy and should not be alarming. The data below shows that these pullbacks are common rather than extraordinary. Since 1928, the largest intra-year drawdown averages -16.0%, yet year-end returns typically remain positive. The message here is clear: it pays to stay patient, not reactive.

Lastly, in my opinion, this feels like a normal pull back, as the areas of the market that have been hit the hardest are the places that many would consider to have had irrational exuberance in their returns since the election, i.e., high-beta stocks, highly-valued stocks, and the most risk-on areas of the market have led the pull back. When these areas of the market are leading the pullback, it tends to be a healthy and short-lived correction.

2. I’ve slowed down on my individual stock writing for the “Aptus Musings”, but given the recent pullback in the market and the moving pieces under the hood of the S&P 500, I thought I’d bring it back. For reference, dispersion across names in the S&P 500 is in the 98th percentile over the last five years. This means that there is a lot of dispersion amongst names and low correlation, i.e., names are doing wild and crazy things as we are going through a period of time where CY 2024 earnings are being reported and a potential / threat for a substantial amount of change in Washington, D.C. policy.

In today’s musing, we’ll be highlighting Aptus’ most recent addition to the portfolio – NVIDIA Corp. (NVDA).

Compounder Factsheet
Compounder Philosophy

 NVIDIA Corporation

Tech’s negative trend is probably one of the most important equity market developments to start 2025. It doesn’t mean good charts can’t be found within the sector, but the likelihood of consistently picking winners goes down without the sector at your back. But this type of weakness does breed opportunity, and we continue to believe that there is opportunity to own NVDA.

As of 3/4/2025, NVDA is -13% from its recent ATH, but the weakness in the stock feels more like a hedge fund de-grossing story for the entire semiconductor / AI space than a fundamental growth worry. And when you get pullbacks that are caused by this type of liquidity event, it’s tough to recognize when the selling will stop, so I cannot call a bottom. However, we believe that NVDA is hitting a point of valuation support.

Let’s talk valuation because I feel like that is the go-to scapegoat as a reason not to own the stock. The stock currently trades at 25x forward earnings:

1. NVDA now trades BELOW parity relative to the PHLX Semiconductor Sector Index (SOX) – something the market has seen only once or twice in the past decade;

2. NVDA only trades at a slight S&P premium, the lowest they have been since 2016.

And this is the cheapest valuation the stock has seen, and it’s at the beginning of a new product cycle, which baffles me. The stock tends to do well during new product cycles, such as the Hopper. Though I do recognize that the Blackwell introduction has not gone as smoothly as Jensen would have liked, a few of our research partners have stated that Blackwell witnessed $11B of shipments in January, suggesting that the floodgates have been opened.

We don’t just like the valuation of NVDA, we love it. And we love the growth opportunity because the U.S. is already starting to price in a slowdown of growth – and this is before the tariffs debacle. Then, global growth is also undoubtedly slowing.  We believe that this leaves the AI trade as an idiosyncratic area of growth. The scarcity growth premium might find its way back to NVDA.

So, what is there for investors to worry about?

Increased Regulation: Given the current trade tensions, there could be more restrictions and bans on China shipments. I would note that NVDA’s China sales, while reaching record levels (~$17B in FY25), are at the lowest % of revenue (13%) in the last 10 years.

AI Diffusion Occurs in May: These are basically new rules that place additional controls on where advanced AI components can be shipped. Said another way, it will force customers in many countries to obtain new licenses in order to purchase sizable amounts of NVDA hardware. We believe NVDA’s H20 shipments to China should be unaffected by the new controls as they only seem to apply to components already impacted by prior controls (the H20 is low enough performance to be exempt from restrictions).

The AI Trade is Long in the Tooth: Personally, I think that this is a bit premature. Why? Sentiment has clearly pivoted for now on the AI group. However, spending intentions seemingly continue to rise, plus a new product cycle is just kicking off. For example, there continues to be outsized investments in capex and R&D have supported the exceptional performance of US stocks during the past decade. In 2025, the Magnificent 7 companies will boost their capex by 31% YoY to $331B. If you simply rewind history back to October, just four months ago, these companies were “only” expected to spend $263B on capex (+13%).

Given how noisy 2025 has been so far, I think being quiet isn’t such a bad thing. Even though there was tremendous angst going into NVDA’s recent earnings results the other week, I would characterize the print as relatively quiet. It appears that the company is through the worst of the ramp issues, with all Blackwell configurations now in full production across the board. Gross margins at 71% might be a minor nitpick, but I won’t argue that getting product out the door should be the primary consideration at the moment, given that demand seemingly remains off the charts and the company still sees them coming back into the mid-70s range by year-end.

Overall, the secular story around that demand seems as robust as ever as the market moves from pre-training to a post-training world, with management remaining bullish that compute requirements are only growing stronger from here.

Overall Thesis

We see NVDA as a major beneficiary of the 4th tectonic shift in computing, in which parallel

processing captures share in the computing market. We believe that the market underappreciates NVDA’s businesses and its transformation from a traditional PC graphics chip vendor into a supplier of high-end gaming, enterprise graphics, cloud, accelerated computing, and automotive markets. From our perspective, the company has executed consistently and has a solid balance sheet with what we believe to be a demonstrated commitment to capital returns. We understand the unwelcoming landscape regarding China and the U.S. restrictions but believe that they are manageable over time.

And don’t mention valuation to us – it trades at 25.2x forward earnings, a level lower than most of the Magnificent Seven. At this valuation level, it’s the stock’s weakest level in a year and close to 10-year lows. In fact, the stock now trades below parity relative to the SOX (something we have seen only once or twice in the past decade) and at only a slight S&P premium, the lowest they have been since 2016.

Disclosures

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

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