Inflation, Trump’s Tariffs, The Mag 7, and the Risk and Opportunity Set – How Our Investment Teams View the Road Ahead for 2025

2025 Outlook | December 2024

At Catalyst Funds and Rational Funds, we partner with investment managers to bring alternative strategies to the retail space. In this piece, we surveyed five of our portfolio managers spanning across multiple asset classes to weigh in on what they see as the emerging threats, trends, and opportunities for investors as we enter 2025.

We hope these insights are helpful to you as you prepare your investment approach for the upcoming year. We would be happy to discuss how our solutions best fit into your portfolio moving forward.

Here is a summary of the managers we spoke with for their outlooks.

1. What are your expectations for inflation in 2025 and the Fed’s path going forward? 

Our managers largely see the worst of inflation as behind us, with some potential risks ahead. Though most of our respondents see a target of between 2%-3%. 

“We expect inflation to be sticky from here and even slightly rise in 2025 while not getting out of control like we saw in 2022,” said Eric Clark, Portfolio Manager of the Rational Dynamic Brands Fund. “Largely, we believe rates and inflation will stay higher for longer and be volatile around economic reports.”

He notes that he expects there to be short-term volatility created around these data releases as short-term traders position and react to any moves – and plans to adjust his investment approach as they do so. His Fund generally invests in large names of recognizable brands.

“Our relevant holdings are set using this base case in mind, so we have brands with great balance sheets, pricing power, high brand loyalty and that are offering customers reasons to spend and be loyal,” he said. “The current inflation regime is not generally affecting their businesses or customer loyalty.”

David Miller, Co-Founder, Portfolio Manager, and Chief Investment Officer of Catalyst Funds and Rational Funds, has moderate expectations for inflation, with the belief that it will hover around 3% in the coming year. He notes that given the strength in GDP growth numbers and unemployment, the Federal Reserve may only need one more rate cut.

Patrick Welton, Founder and Chief Investment Officer of Welton Investment Management, has a similar view on inflation.

“We expect inflation drifting between 2 to 3 percent,” he said. “Dislodging it from this range will require policy, economic, or geopolitical changes outside the market’s expectations. The Fed’s path will halt if its prime directives are hit. If either inflation rises above 3% or the unemployment rate begins to trend down, we expect the Fed path halts or turns around. In this setting, our strategy would likely see returns shifting from broad equity sources in 2024 to any or all of selective equity sector/industry moves, short bonds, long inflation trades, and currency trends.”

Joe Tigay of Equity Armor Investments believes the Fed will be “data-dependent, allowing economic conditions to dictate policy decisions.”

“If inflation persists at manageable levels, the Fed will likely allow interest rates to normalize gradually,” he said. “This environment sets the stage for a steepening yield curve, which historically signals rising volatility.”

Finally, Roy Niederhoffer of R.G. Niederhoffer Capital Management, notes that inflation “appears to be under control, despite some recent hints of its return.”

“However, asset valuations are quite high,” she said. “We may be in a situation like the QE years, where consumer prices are stable while equities and other financial assets inflate. This may be due to stimulus via government borrowing, and now potentially lower interest rates.”

In short, the consensus view is that the worst of inflation is behind us, but it’s important to have your guard up. 

2. Overall, how should investors change their thinking from 2024 given the incoming Trump administration, including any concerns about tariffs, government spending, and potential changes to corporate tax rates?

He’s Time Magazine’s Man of the Year for 2024 and based on our managers viewpoint, President-Elect Donald Trump is likely to be a main character driving markets in 2025 as well, with volatility being the key concern.

“Investors should expect tariffs, minor reductions in government spending, and broad tax policy extensions to be rapidly implemented in Q1 of 2025,” Welton said. “And if they do, they should expect the market to do nothing. These are fully telegraphed, expected, and priced in. Markets will react if expectations are defied.”

But will tariffs be long-term or just something to bring to the negotiating table?

David Miller believes they’ll “likely be used as a negotiating chip to try to extract better trade terms with countries that have tariffs on U.S. products.”

Joe Tigay of Equity Armor believes the Trump administration “will usher in a landscape of winners and losers, making stock selection pivotal in 2025.” He believes that “investors must prepare for periods of uncertainty and tumult.”

“President Trump 2.0 will usher in a historic shift in American political, regulatory, policy and cultural landscape,” according to Niederhoffer. “However, equities face powerful two-way forces that could pull stocks sharply higher or considerably lower. Given the overall bullish tendency in equities, we suggest positioning that maintains upside capture with accommodation for reduced downside risk.”

But along with potential volatility, there comes opportunity.

“Policy changes and geopolitical tensions could create market swings, making long volatility a critical component of a balanced approach,” Tigay said. “Deregulation and potentially lower energy costs could act as boons to the economy, favoring sectors like energy, financials, and industrials… Investors must embrace the dual narrative of growth amid volatility. Staying flexible and focusing on the right sectors—such as energy, industrials, and technology—will be key to capitalizing on the opportunities of 2025.”

Although Eric Clark is also on guard for volatility, he notes that fewer regulations could lead to more opportunities for growth.

“Overall, we think it will be a more business friendly environment with less onerous regulations which should affect business confidence and consumer sentiment positively,” Clark said. “We also think the benefits of AI adoption across corporate America will in time, allow companies to trade at higher average multiples and with higher margins so generally, in a 3–5-year look-back, stocks will not look as expensive then as they do today.”

3. The story of the S&P 500 has been primarily about what markets are calling the Mag 7 stocks. Do you think this will continue in 2025 or do you expect other key players to emerge? Is there any concern of concentration risk? 

In short, our managers think the Mag 7 will continue to carry the day, but there may be room for more in this “winner and losers” environment. 

David Miller: “The Mag 7 stocks are generating significant growth in terms of revenue and earnings power. These companies are massive monopoly businesses with strong fundamental tail winds. I have no reason to believe that the Mag 7 names won’t continue to dominate the S&P in 2025.”

Patrick Welton: “Yes. This is the story of winner’s success combined with automatic passive flows into cap weighted indices. Though there has been rotation over time, concentration risk has accompanied the S&P 500 for decades.”

Roy Niederhoffer: “The concentration of the S&P into a small number of stocks is perhaps a result of a secular shift toward ‘survival of the fittest’ – or (as several astute market analysts have pointed out) it could be merely a symptom of more and more passive rather than active investors. It portends an increase in volatility regardless of the direction of equities.”

Joe Tigay agrees that 2025 will likely follow a similar pattern, but there’s a chance for more than just a Mag 7 driving returns of the S&P 500.

“I expect new players to emerge and join the mix, particularly in sectors like industrials, energy, and financials, which could benefit from a growth-friendly economic environment and deregulation under the Trump administration,” Tigay said. “This evolution underscores the uncertainty inherent in the market, making a strategy of being long the market and long volatility essential.”

Eric Clark believes the market and returns “will continue to broaden out.”

“Overall, we think performance for Mag 7 in 2025 will be more nuanced and selective,” he said. “We like Amazon, Apple, and Meta more than Nvidia, Microsoft, and Google. We do think Microsoft can have a decent year, we like that the stock has been consolidating for a few months, which gives it room for the next push up at some point. Growth and stability should be in high demand for 2025.

But what about concentration risk?

“While the Mag 7 remain vital, their outsized influence raises concentration risk,” Tigay notes. “This highlights the need for diversification and a readiness to capitalize on shifts in leadership. By balancing exposure to these dominant names with opportunities in ascending sectors, investors can navigate both the gains and the inevitable bouts of volatility that will define the market in 2025.”

4. What are the biggest risks you see for investors in the coming year in your particular space? 

For these next two questions, we’ll let the portfolio managers have the floor, but in short, diversification is their key to fighting potential volatility. 

Eric Clark, Equities:

If inflation stays higher for longer, that keeps the Fed on hold versus having more rate cuts so any datapoints that show inflation could be percolating up again could cause knee-jerk selling on a short-term basis. Certainly, much more aggressive tariff implementations could cause a sell-off in certain parts of consumer and retail stocks as well as other industries that could be affected. Another risk is always geopolitics and Trump antagonizing foreign governments causing a trade war. A more contentious relationship with China could be problematic for stocks heavily exposed to China and the consumer there. The biggest risk now could be excess speculation getting more acute at a time when valuations could get stretched. That could cause a market correction within the overall bull market. Wall Street strategists are very bullish about 2025 which could be a contrarian signal as they have been neutral to bearish the last few years expecting a recession that never materialized. When it feels like there’s nothing to worry about, we get worried.

David Miller, General Market Commentary:

The biggest risk for investors in 2025 is that strong growth combined with government deficits will drive interest rates higher and temper the growth in equity valuations.

Roy Niederhoffer, Alternatives/Equities:

Risks include an unexpected bear market that catches investors fully invested with no downside protection, a recurrence of inflation that makes stocks lose real value, potentially even as they rise nominally. Geopolitical and unknown risk factors are ever-present.

A key portfolio risk could be a failure to maintain enough long exposure to keep up with equity markets should they continue to rise. If the rise is caused by asset price inflation/fiat devaluation rather than earnings growth, there could be a significant loss of real value – even as stocks rise. Should fiat devaluation spiral into high inflation, sharply negative real – versus nominal – returns year after year are far more dangerous to portfolios than the risk of a bear market for stocks. We’re not necessarily worried about a Venezuela or Zimbabwe hyperinflationary disaster, but something more moderate that becomes severe over time.

Joe Tigay, Equities/Volatility Trading:

In 2025, the biggest risk for investors in the alternative investment space is failing to maintain the right mix of funds in their alternative basket. With the potential for rising inflation, a steepening yield curve, and increased volatility, having a diversified and strategically balanced alternative portfolio is more critical than ever.

Here are the key risks:

1. Overconcentration in One Strategy: Relying too heavily on a single alternative asset class, such as private equity or real estate, could leave investors exposed to sector-specific downturns or liquidity risks.

2. Underestimating Volatility: With market uncertainty on the rise, not incorporating volatility-focused strategies—like long vol or tail risk hedging—could erode returns during sharp market swings.

3. Neglecting Inflation Protection: Without assets that can hedge against inflation, such as commodities or infrastructure, investors may see their portfolios lose purchasing power.

Patrick Welton, Equities/Alternatives:

One large and portfolio damaging risk would be the simultaneous forces of a second wave of rising inflation and material further expansion of fiscal deficits. The bond markets will be forced to react and catalyze reactions across asset classes everywhere. Though likely a tail wind for our strategy’s performance, it would be bad for the country and likely horrific for 60/40 investors, reviving memories of 2022.

5. How would you describe the opportunity set for investors in your area of coverage? 

Eric Clark, Equities

Consumer stocks have generally been ignored and flows in the space are almost non-existent as witnessed by ETF AUMs. The consumer and spending beneficiaries are about the least crowded trade in markets and we expect the consumer to stay stable and spending, albeit not spending as broadly as normal. They are looking for bargains and quality so consumers will be getting better deals from retailers and brands because consumers have pushed back on price increases.

We understand consumer behavior and which brands are resonating the most, so we believe our portfolio is well-suited to navigate this continued environment. Overall, there’s a lot of exciting brands with strong EPS growth in 2025 expected and many stocks still have 20%+ price appreciation potential as consumer spending gets back to normal over time. Because the portfolio looks very different than the indexes, we expect more advisors to be interested in the story as the indexes, heavy in tech, become riskier and they seek other diversifiers. Also, because we can play offense and defense, we like having a blend of both in portfolios as the market reaches a short-term ceiling. Having some defensive exposure plus some cash should be a good story in 2025. We should not expect to see such outsized gains as the last two years. We expect the volatility to continue in markets offering the active trading part of the process to help generate alpha as a non-correlating asset class inside the core brands holdings. We expect blending offense and defensive brands will add value over indexes in 2025 and on an absolute basis.

David Miller, General Market Commentary

The equities we own in the Catalyst Insider Buying Fund are benefiting from the current strong economy and are likely to benefit from pro growth policies under a new Trump administration.

Roy Niederhoffer, Alternatives/Equities:

Our strategy seeks to maintain a fully-invested position in large-cap equities, overlaid with a quantitative short-duration futures trading strategy that has tended to outperform in periods of volatility and equity market declines. This overlay can succeed in reducing downside, making it a potentially valuable complement to the long equity holding.

Since our most successful periods have come during the large down years in equities (e.g. 2000, 2008, 2022) the overlay product could be ideally positioned should stocks turn downward without requiring investors to reduce overall long exposure. 

Joe Tigay, Equities/Volatility Trading:

The opportunity set for investors in our fund is uniquely compelling as we enter 2025. With a new administration focused on growth and actively cheerleading the market higher, coupled with a Federal Reserve aligned toward pro-growth policies, the environment is ripe for capturing upside potential.

With volatility ending the year at historic lows, we see a rare opportunity for investors to position themselves for success in a pro-growth, low-volatility environment. Here’s why:

1. Growth-Focused Strategy: Our fund is built to capitalize on expanding markets, supported by government policies aimed at deregulation and economic stimulation.

2. Low Volatility Entry: With the VIX currently near historic lows, now is an ideal time to gain exposure to volatility strategies, which offer significant upside as market uncertainty inevitably returns.

3. Multiple Pathways to Success: Our approach delivers in three scenarios:

1. • If stocks rise, we’re positioned to capture market growth.
   • If volatility increases, our strategy benefits from its hedging component.
   • If both stocks and volatility rise, our fund excels by leveraging both trends simultaneously.

This moment represents a unique entry point for investors seeking to maximize returns in a growth-oriented, low-volatility environment. Our fund is designed to align with the opportunities presented by this pro-growth era, offering a diversified and resilient approach to capitalize on 2025’s market dynamics.

Patrick Welton, Equities/Alternatives:

We are broadly diversified and unconcentrated. Our fund routinely holds more than 250 positions across every liquid asset class. There are generally always some sectors with great opportunity and others with very little. Our fund nearly always benefits from large, sustained changes in equity valuations, rotations, economic fundamentals, interest rates, inflation, and currency flows and finds less opportunity in long periods of market calm with little movement.

Important Disclosures:

Diversification Does Not Ensure a Profit or Protect Against a Loss.

An investor should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing or sending money. This and other important information about the Catalyst Funds can be found in the Fund’s prospectus, which can be obtained by calling 1-866-447-4228. Please read the prospectus carefully before investing. The open-end fund products for Catalyst Funds are distributed by Northern Lights Distributors, LLC., Member FINRA/SIPC. Foreside Fund services and Catalyst Capital Advisors are not affiliated with Northern Lights Distributors, LLC. The Catalyst Strategic Income Opportunities Fund is distributed by Foreside Fund Services, LLC, which is not affiliated with Catalyst Capital Advisors LLC, or any of its affiliates.

The Rational Fund Investors should carefully consider the investment objectives, risks, charges and expenses of the Rational Funds. This and other important information about the Funds can be obtained by calling (800) 253-0412 or at www.rationalmf.com. The prospectus should be read carefully before investing. Funds are distributed by Northern Lights Distributors, LLC., Member FINRA/SIPC. Rational Advisors, Inc. is not affiliated with Northern Lights Distributors, LLC.

“Mag 7” or the “Magnificent 7” refers to a group of seven high-performing and influential companies in the U.S. stock market. These companies include Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and NVIDIA.

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