Tariff Tantrum vs. Reality Check

Joseph: Since Trump’s “Liberation Day” tariffs on April 2, soft data (like surveys) has collapsed, while hard data (like jobs and spending) hasn’t budged. It’s a reminder that sentiment often reacts faster than the economy actually does—if it reacts at all.

Source: Citigroup as of 05.28.2025

Divergences Usually Converge

John Luke: While the split between what people feel and what they do is getting louder, they eventually converge. Job growth, income, and GDP are all holding up, with Q2 estimates now pushing higher. Right now, that story still looks solid, even if the vibes don’t match. Which will win?

Source: 3Fourteen Research as of 03.31.2025

S&P 500 Goes Full Rocket Mode

Beckham: A 20 percent move in just 28 days? That’s rare air for the S&P 500. The last three times this happened, the market was higher a year later. Short-term fireworks, long-term signal?

 Source: 3Fourteen Research as of 05.28.2025

May Meant Business

Dave: The S&P 500 just had its best month since the fall of last year (and second largest month since last May). May continues to show up when bulls need a lift.

Source: Mike Zaccardi as of 05.31.2025

May Strength “May” Mean Strength

Arch: May posted a 5%+ gain for the S&P 500. Why does that matter? Because in every previous case where May gained more than 5%, the market was up over the next 12 months.

Source: Carson as of 05.28.2025

The World Takes a Strong Lead at the (Almost) Halfway Point

Joseph: Despite the bounce in May, the U.S. market is trailing international markets by the widest margin year-to-date since 1993.

Source: Bloomberg as of 05.31.2025

Is it Yields Keeping the US Down?

Brad: There’s no magic interest rate that kills equity returns. Since 1940, S&P 500 returns have shown no consistent pattern based on nominal yields.

Source: Shiller, Goldman as of 12.31.2024

Big Tech’s Valuation Diet

Arch: A portion of the relative lag in the U.S. is due to the MAG-5 seeing their P/E ratios drop as earnings caught up to price. These names are still priced at a premium to the broader market, but the decline has been real.

Source: Strategas as of 05.31.2025

The MAG-7 Premium… It’s All Relative

Brad: Yet the MAG-7 premium in relative terms compared to the rest of the S&P 500 has dropped to 43 percent, the lowest since 2017. Still higher, but justified?

Source: Strategas as of 05.31.2025

Small Caps, Large Red Flags

Dave: Investors can own small caps at a discount, but in many areas that discount may be justified. While that’s not unusual during speculative episodes, the current level suggests that broad small-cap exposure is still littered with unprofitable firms. An allocation to higher quality small-caps may be the antidote.

Source: Strategas as of 05.31.2025

Is the Fed Looking Yet?

John Luke: PCE inflation is sitting at 2.1 percent, right where the Fed wants it. Meanwhile, real yields are at decade highs. If the Fed is really data dependent, the case for a rate cut is getting stronger.

Source: Bloomberg as of 05.31.2025

Expensive Doesn’t Always Equal Worse

Brian: Yes, homes used to be cheaper. They were also way smaller (and used to lack plumbing). In 1950, most homes were well under 1,500 square feet, while today, less than 25% are under 1500 square feet. Today, buyers want offices, islands, and three bathrooms. Adjust your nostalgia accordingly.

Source: 24/7 Wall Street, Census, Aptus as of 12.31.2024

 Takeaways

• • Market reactions and economic reality often part ways
  • Seasonality and momentum are alive and well
  • Small caps still need a quality filter
  • Big tech is still big, but not as bubbly
  • Inflation is cooling, but not investor excitement

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-2506-30.

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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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John Luke: The S&P 500 has developed into a much more quality-focused index than in its past

Source: @warrenpies as of 05.28.2025

Dave: with Mag 7 tech names continuing to build on their fundamental leadership

Source: Raymond James as of 05.28.2025

Brett: While the chatter was that Q1 earnings calls would be void of future guidance, companies spoke confidently of their outlooks

Data as of 05.27.2025

Dave: which supported the overall positive tone coming out of Q1 earnings season

Arch: “Soft data” diverging (and ultimately converging) with hard data is not a new phenomenon

Data as of 05.23.2025

Joseph: and we’re starting to see the (weaker) soft data move in the direction of the hard data as the tariff tantrum subsides

Data as of 05.23.2025

Dave: On the subject of hard data, consumer spending of late has been both consistent and in line with income

Data as of April 2025

John Luke: with baby boomers the most reliable constituents, spending from both lifetime savings and fresh Social Security checks

Brad: China is no friend to the US as a whole, but the access has been a boon to US companies, especially those in technology and communications

Beckham: and while both US and Chinese corporations have benefited from access to cheaper input costs, China has started to look to other markets to reduce its reliance on the US

Data as of April 2025

John Luke: 2025 performance of US stocks vs. the rest of the world has been pretty weak

John Luke: but the 2025 catchup is tiny in comparison to the US dominance from 2020 through 2024

John Luke: The primary driver of US dominance has been superior fundamentals, as European companies in particular have continually failed to grow

Source: Alpine Macro as of 05.27.2025

Jake: and the US dominates the world in developing financially successful companies

Data as of March 2025

JD: We’re on to the “lower taxes and regulation” part of the DC agenda, with the proposed tax bill another source of juice for the economy

Data as of 05.23.2025

John Luke: and with the debt and deficit already in the danger zone, the policy approach would seem to favor running the economy fast enough to outgrow the expanding debt burden

Data as of 05.27.2025

Ten: The US government has no appetite to reduce the growth of spending

Data as of 05.25.2025

Brian: but US consumers have dramatically reduced their debt relative to assets

Data as of 05.28.2025

Brad: Market reactions to tariffs have become more tame, but there’s still a wide dispersion of possible paths

Data as of 05.29.2025

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.

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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.

The graphic below (blue line) shows the weighted average cost of our debt, which sits currently at ~3.3%. The red line shows the net interest cost as a percentage of tax receipts, which currently sits at about 18%, several percentage points above the 14% level where bond vigilantes have historically begun to push austerity measures.

Keep in mind that 2024 was a record year for tax receipts on the back of strong asset market performance.

10 Year Yield Components

We’ve gone through this exercise in the past, where we look to break down the US 10-year yield into its three components:

• • Inflation expectations,

• • Real yields (the expected path of monetary policy), and

• • The term premium

All 3 components of the yield have increased since COVID. First, we had inflation, then the tighter policy (which hasn’t totally cured the inflation), and recently, a widening in the term premium.

What should we make of these moves? On inflation, the situation isn’t surprising. As we have said repeatedly since COVID, the prevailing tendency of inflation has shifted. 2% was a ceiling on inflation in the 2010s and is now serving as a floor. Why? We think because of a faster growing economy, fiscal policy responses, and tighter labor markets.

Real Yields

Central banks have kept rates high, and their economies haven’t crumbled. The explanation:

• • A decade of deleveraging after the Global Financial Crisis (GFC) has left balance sheets in their best shape since the 90s

• • Fiscal policy is now more activist (a different fiscal/monetary mix than past cycles)

• • Aging demographics

• • Looking ahead to the massive investment needs of the 2020s

If you are inclined, you could say that the imaginary r* (natural level of interest rates) has risen. 10-Year real yields currently sit above 2%.

Term Premium

The Term Premium is the extra yield investors demand for holding long-dated securities rather than rolling over short-dated paper. The popular trope is that it reflects “fiscal risk”, or “too much issuance” or, when absent, manipulation such as Quantitative Easing (QE). The boring reality is that the Term Premium reflects the hedging properties of government bonds. In addition, rising term premia can strike fear into equity investors.

For two decades, bonds were a positive carry equity hedge. Investors only had to think about demand shocks, which meant inflation moved in tandem with GDP. In a recession, bonds rallied, cushioning equity losses.

Meanwhile, everyone had faith in policymakers (Fed Put). You could rely on the Fed to keep expectations anchored, which meant you didn’t need to worry about stagflation. When bonds had these properties, investors paid an insurance fee to hold them – hence a negative Term Premium.

Bonds’ Ability to Hedge Equity? Diminishing

We’re now ready to talk about the real danger in bonds. While the rise in yields has been mostly benign (so far), it is worrying that the hedging properties of bonds have deteriorated, and the term premium is edging higher. Bond and equity returns have been positively correlated, which is not what you want if you are looking for insurance.

Remember, bonds can’t grow, and are at the mercy of the government protecting their purchasing power (by limiting debasement). Given US Treasury Secretary Scott Bessent’s recent comment on growing the economy faster than the growth of the debt, market participants are taking notice.

Long-Term Bonds Are Being Impacted

Bond investors are showing an unwillingness to lend to at below inflation rates to fund (reckless) government spending forever. The circumstances for each country may vary but the underlying force is identical…post-COVID, the world has changed. Inflation is higher, central banks are not buying up bonds as they once did. But governments still want to borrow and run major deficits. Bond investors are requiring governments to more properly reward them for the risks (i.e., debasement).

In saying that, the benchmark 10-year Treasury yield, at 4.5%, is more than a percentage point lower than its historical average of 5.6% since the 1950s. Even if you remove the period from 1980 to 1985 in which the 10-year yield was persistently above 10%, that historical average declines only modestly to 5.1%, still well above the current yield.

Most investors have been influenced by the ZIRP-like policies of the post-GFC economy, which we believe are unlikely to return.

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-2505-23.

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Beckham: Rising yields is not just a U.S. phenomenon

Data as of 05.22.2025

John Luke: though if you look at the past couple of years, it’s just been a rolling series of shifting narratives

Source: Piper Jaffray as of 05.21.2025

John Luke: either way, there’s no escaping the sharp rise in borrowing costs for the U.S. government

Data as of 05.16.2025

Brad: The current rates yo-yo revolves around the ongoing news cycle of high tariffs vs. low tariffs, and how that might flow into the Fed’s rate plans

Data as of 05.20.2025

John Luke: Stepping away from the tariff discussions, conditions for a severe recession just don’t seem to be there

Data as of 05.19.2025

Joseph: and consumers in general remain in very good shape with respect to debt

Brian: Younger buyers continue to have a hard time entering the housing market

Data as of March 2025

Jake: which takes away a huge population of potential buyers in a market where prices have generally flattened

Data as of 05.16.2025

Brett: For the first time since before the tariff tantrum, consensus earnings estimates are rising

Source: @LizAnnSonders

John Luke: with Mag 7 stocks leading the way with generally strong outlooks coming out of earnings calls

Source: The Market Ear as of 05.19.2025

Dave: and that better relative earnings performance has narrowed the valuation gap between the Mag 7 names and the rest of the market

Source: The Market Ear as of 05.19.2025

Arch: The cost of money has historically impacted equity valuations more in periods of positive correlation between stocks and bonds

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-2505-21.

The post The Market in Pictures, May 23 appeared first on Aptus Capital Advisors.

Source: Strategas as of 05.19.2025

When S&P downgraded the US credit back in 2011, many derivative contracts, loan agreements, investment directives, and similar documents prohibited using non-AAA securities for collateral. The fear was that a downgrade below AAA meant Treasuries would no longer be eligible under these rules and would create forced selling.

Cooler heads soon prevailed as the 2011 downgrade left the US split-rated AAA (Moody’s Aaa, Fitch AAA, S&P AA+). So, the US was still AAA and not in violation of these contracts. In the years after 2011, those contracts were rewritten from “AAA securities” to “government securities,” thereby excluding the credit rating qualification.

Back in August 2023, when Fitch downgraded the US to AA+, and the US became a split-rated AA+ country (S&P and Fitch AA+, Moody’s Aaa), officially losing its AAA status, it had almost no effect on the bond market. No one was forced to do anything.

The Moody’s downgrade isn’t really telling investors anything they didn’t already know. S&P and Fitch were earlier movers on the downgrade citing similar concerns. We’ve seen the fiscal picture steadily worsen over the past 15+ years, it’s just recently become more noticeable given higher interest rates and the associated interest cost burden associated.

Time for Austerity?

The biggest thing is that improvements to the deficit have not been addressed. Historically when interest costs exceed 14% of tax revenues, fiscal hawks (or bond vigilantes) force change with some type of austerity measures.

Source: Strategas as of 05.19.2025

Another wild stat is that deficits are this elevated even with tax revenues at an all-time high in April, after a great year for equity markets in 2024.

Unaddressed Deficits

Interest costs have surged in nominal dollars, but when compared to the % of GDP, are only back to levels from the mid-90s.

Source: Strategas as of 05.19.2025

Source: FRED as of 05.19.2025

The US fiscal situation has become untenable. But did we need Moody’s to tell us this? It was hardly a secret. That said, the act of downgrading the US will not force anyone to do anything. No one will have a forced liquidation like the worry when a company/country loses its investment grade rating. Besides, the US was already split-rated AA+ due to the previous S&P (2011) and Fitch (2023) downgrades. So, Moody’s downgrade changed nothing; they just aligned with S&P and Fitch.

Impact on Stocks

From a risk asset stance, looking past the initial blip in markets from past downgrades, markets were higher 6 and 12 months later in both scenarios (S&P in 2011 and Fitch in 2023). While past performance is of course no indication of future performance, to say the downgrade will be devastating to stock markets has historically proven untrue.

Source: Yahoo Finance as of 05.19.2025

Bottom line, we all know it’s not sustainable to run budget deficits of 7% of GDP with this level of employment. The US needs to get federal spending in check to see meaningful deficit reductions. Time will tell on how/ when that happens but we think with the move higher in yields (and ensuing media coverage) could pressure congressional attention sooner rather than later.

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-2505-19.

The post Moody’s Downgrade: Should We Care? appeared first on Aptus Capital Advisors.

But in taxable accounts, that perspective can be misleading. What ultimately matters isn’t the size of the coupon. It’s how much return you actually keep, and how much control you have over when taxes are paid.

Let’s look at three common paths in fixed income to illustrate why structure and timing make such a difference in outcomes.

Three Paths, Three Very Different Outcomes

Let’s walk through three examples to highlight how the structure of returns impacts what you actually take home.

First, municipal bonds. They offer tax-exempt income. If you earn 3.5%, you keep 3.5%. That simplicity has made them a staple for high-income investors. But the tradeoff is relatively low absolute returns, especially in today’s tight-spread environment.

Now,take traditional taxable bond funds. These might offer a 4.8% yield, but that’s before taxes. At a 33% marginal rate, that return drops to just 3.2% after tax. Worse, taxes are paid annually, which interrupts the compounding process and drags on long-term results.

Now consider a strategy that generates the same 4.8% return but defers gains for 10 years, taxing them at a 20% long-term capital gains rate. The after-tax return rises to 4.0% as each dollar compounds at 4.8% for 10 years before taxes are paid. If the gains are deferred for 20 years, the after-tax return improves to 4.2%. This ability to delay taxes and pay them at a lower rate enhances long-term compounding in a meaningful way.

What You Keep Matters More Than What You Earn

Here’s the kicker: to match the 4.0% post-tax return in the deferred example above using traditional taxable bonds, you’d need a 6% return / yield. That’s because every dollar earned is taxed annually at a higher rate, making it harder to reach the same result.

For investors who are reinvesting income rather than living off it, the structure of the return can be more important than the size of the yield.

Below is a chart highlighting that an investor who receives 4.8% / year taxed at a 33% short-term rate would compound their wealth to significantly less money than an investor who receives the same 4.8% return deferred for 10 years.

And that difference grows over longer periods.

A Shift in Asset Location Strategy

An investment approach that focuses on total return while limiting taxable distributions also opens the door for better portfolio construction across taxable and tax-advantaged accounts. Today, many advisors face a tradeoff:

• • Hold fixed income in taxable accounts and lose return to taxes, or
  • Place it in IRAs and Roth accounts, sacrificing those valuable slots for investments with likely lower return potential than equities

But if a stable allocation typically used for traditional, tax-inefficient fixed income can be structured in a way that defers income payouts and taxes to improve after-tax return, it becomes more viable in taxable accounts. That frees up space in IRAs and Roths to hold higher-growth assets like equities, potentially enhancing overall wealth accumulation without increasing risk.

That’s why investors should look beyond the size of the coupon and think instead about how, and when, those returns are realized. The desire for yield often stems from the sense of certainty it provides, but many investors aren’t living off their bond income. They’re reinvesting it. And if that’s the case, capturing returns through appreciation instead of income offers a better path.

Tax Timing = Control = Opportunity

When returns come in the form of income, taxes are due whether you need the cash or not. But when returns are embedded in price appreciation, you gain control. You decide when to realize gains, whether to offset them with losses, and potentially how much tax to pay. That kind of flexibility is difficult to find in traditional fixed income strategies.

If you’re going to earn a return either way, would you rather have it taxed every year, or let it grow uninterrupted and pay tax only when it makes the most sense for you?

The Bottom Line

In today’s environment of compressed spreads and rising tax awareness, it’s not just about how much income your bond portfolio generates. It’s about how efficiently you earn your return. Deferring gains isn’t a trick. It’s a smarter way to compound wealth, reduce drag, and give investors greater control over outcomes.

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-2505-17.

The post Rethinking Fixed Income: Why Return Matters More Than Yield appeared first on Aptus Capital Advisors.

Beckham: It’s hard to classify this rally as a dead cat bounce, it’s been one of the better recoveries historically

Dave: and one that’s being achieved with no help from the bond market

Source: Raymond James as of 05.14.2025

Ten: Fund managers as a group seem reluctant to join the rally

Source: BofA as of 05.12.2025

Mark: with investor sentiment measures still tracking far more concern than euphoria

Data as of 05.09.2025

Brian: Speaking of sentiment, US consumers report themselves to be just as gloomy as fund managers

Graphic via WSJ as of 05.16.2025

Dave: with inflation expectations a particular sore spot and far above market and economist expectations

Data as of April 2025

John Luke: The ironic thing is that actual inflation measures continue to fall towards FOMC targets

Data as of 05.14.2025

John Luke: and CPI has been below expectations in each of the past 3 monthly reports

Data as of 05.14.2025

Brad: Walking back stated tariffs has been a big contributor to the market recovery, but Corporate America has been a big contributor as well

Data as of 05.13.2025

Dave: though the bar looks really high for the 2nd half of 2025

Source: Raymond James as of 05.09.2025

JD: Recession expectations are receding nicely, as investors re-embrace positive growth estimates

Data as of 05.09.2025

John Luke: as market participants digest the impact of tariffs that look to be higher but not as high as feared

Brad: Small cap stocks remain unable to sustainably outperform large caps

Data as of 05.15.2025

Dave: and concerns of higher rates won’t help their case

Dave: What small caps need is better earnings growth, which has been lacking for the past 9 quarters

Data as of 05.13.2025

Dave: with the constant hope that the improvement will come “next quarter”

Data as of 05.14.2025

John Luke: Markets are moving from the veggies (tariffs) to the dessert (lower taxes)

Source: CRFB as of 05.13.2025

John Luke: with uncertainty around the specs but a clear trend toward higher deficits

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-2505-15.

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“Scary” Fiscal Policy

In front of tens of thousands of shareholders in Omaha, Buffett delivered a sobering assessment of U.S. fiscal health. He described current fiscal policy as “scary,” citing the federal government’s roughly 7% deficit, more than double what he views as sustainable. Left unchecked, he warned, this trajectory could become “uncontrollable” as soon as 2027. His concern wasn’t just about numbers on a balance sheet. It was about the future purchasing power of the U.S. dollar.

The Inevitable Devaluation of Fiat?

Buffett acknowledged something crypto enthusiasts (and we at Aptus) have long warned about: the structural tendency of governments to erode the value of their currencies. Not out of malice, but out of political necessity. “The natural course of government,” he said, “is to make the currency worth less,” especially when debt obligations pile up faster than tax receipts.

That’s the crux of the Bitcoin thesis. And it’s also a core part of our argument for rethinking traditional portfolio design in this environment.

A Shift in Tone, If Not in Portfolio

Let’s be clear: Buffett didn’t reverse course and endorse Bitcoin. But his message in 2025 landed differently. With inflation still sticky, debt mounting, and political will lacking, Buffett’s remarks echoed many of the arguments made by Bitcoiners and real asset advocates. Some even dubbed it his “orange pill” moment—Bitcoin slang for waking up to the risks of fiat debasement.

Opportunities Outside of Bitcoin: What We’ve Been Saying

Whether or not you buy into Bitcoin, Buffett’s concerns support a broader rethink of portfolio construction. We’ve been calling attention to the same risks, and proposing practical solutions:

• • More Stocks, Less Bonds, Risk Neutral: In a world of structural inflation and fiscal recklessness, cash and fixed-rate bonds are melting ice cubes. We’ve consistently argued that equity exposure, paired with downside protection through options, is the best way to preserve and grow wealth in real terms.

• • Nominal Bonds Can’t Keep Up: Even before Buffett’s remarks, the math was clear: after inflation and taxes, nominal bonds often fail to deliver real returns. In many cases, they quietly guarantee a loss of purchasing power. That’s not defense, it’s decay.

• • The Opportunity with TIPS: If inflation is persistent and deficits remain high, nominal bonds are a losing game, especially after taxes. TIPS, which adjust with inflation, offer investors protection that’s anchored in real purchasing power.

• • Tax Efficiency Matters More Than Ever: With rising deficits, future tax burdens are unlikely to shrink. That’s why we focus on tax-aware investment solutions because real returns only matter if you get to keep them.

Final Thoughts

Buffett built his legacy on owning quality businesses with durable moats. But his final message as CEO wasn’t about balance sheets or competitive advantage. It was a warning: the biggest threat to long-term wealth may no longer be market volatility, but the steady erosion of the dollar’s purchasing power.

No, he’s not buying Bitcoin. But for someone who once scoffed at it, Buffett’s concerns echo many of the same truths: fiat currency is fragile, fiscal policy is broken, and investors need to rethink how they protect their future.

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-2505-14.

The post From Oracle to Orange Pill: Is Buffett the New Bitcoin Convert? appeared first on Aptus Capital Advisors.