Q2 2025 Market Outlook

Commentary as of April 7, 2025

The Macro View: Tariffs, Interest Rates, and Where Investors Can Look Next

By David Miller, Co-Founder and Chief Investment Officer, Catalyst Funds and Rational Funds. Mr. Miller is a portfolio manager on the Catalyst Systematic Alpha Fund (ATRFX), Catalyst Insider Buying Fund (INSIX), Catalyst Insider Income Fund (IIXIX), Rational Strategic Allocation Fund (RHSIX) and the Strategy Shares Gold Enhanced Yield ETF (GOLY).

The state of markets as we enter Q2 2025 continues to be largely driven by geopolitical concerns and changing U.S. policy on tariffs.  The bullish news is that the tariffs are largely now priced into the market and there is the potential for a V-shaped recovery if they are to be removed.  There is also the possibility that the tariffs will lead to a full-on trade war.  However, if the tariffs lead to a trade war, there is a high probability that this development will drive interest rates substantially lower which, in aggregate, could be net neutral for equities.

The key issues to watch going forward are interest rate policy at the Fed, any new tariff developments, consumer confidence numbers, and the delta of gross domestic product (GDP) growth.  The combination of these factors is the primary impetus for moves in markets in the near term.

An interesting contrarian view to take note of is that lower interest rates driven by tariffs could actually be more important than GDP growth. For example, in 2020, GDP dropped precipitously as did interest rates.  Even though Q1 2020 was a severe contraction, the stock market finished the year substantially higher.

When scanning the market for potential opportunities, we believe in gold for investors right now as a combination of federal government deficits and tariffs are driving inflation, which is good for a gold rally.  Additionally, a large central bank gold buying program by the BRICS (Brazil, Russia, India, China and South Africa) nations is creating a positive feedback loop for gold investors.

Equity Market Turmoil & Outlook: What Should Advisors Do Now?

By Dr. Patrick Welton and Dr. François Chevallier-Gravezat, PhD, Welton Investment Partners. Welton Investment Partners sub-advises the Catalyst/Welton Advantage Multi-Strategy Fund (CWEIX).

Q1: From Rally to Reality Check

Optimism Opens the Year

2025 began with the S&P 500 hitting record highs, small caps rebounded, and breadth improved. Q4 earnings surpassed expectations (77% of S&P 500 companies beat earnings per share (EPS) estimates), and year-over-year growth reached 15.1% – the strongest in three years.

Cracks Beneath the Surface

However, beneath the surface, cracks began to appear. China’s AI advances triggered a sharp selloff in U.S. tech stocks, unsettling the AI-led growth narrative. Inflation surprised on the upside, while employment and retail data softened. Consumer confidence experienced its sharpest decline since 2021. Meanwhile, the Fed held rates steady by postponing rate cuts, as tariff threats from Washington against China, Mexico, and Canada reignited fears of a global trade reversal. Given this rapidly evolving landscape, markets increasingly reacted to macro instability rather than corporate fundamentals.

From Rotation to Reversal

By March, equities transitioned from rotation to reversal. Growth stocks faltered while value stocks took the lead. Inflation data fluctuated, the dollar weakened sharply, gold reached highs, and consumer sentiment continued its downward slide. The Fed maintained interest rates but revised its economic outlook. By month-end, March lost -5.6% to become the worst month for the S&P 500 since 2022, including a -10% peak-to-trough correction between February 19 and March 13.

Looking Ahead

Transition in Progress

Markets are at a turning point. We believe the era of synchronized global growth and cooperation is transitioning into fragmentation, trade tensions, and divergent policy directions. The calm post-pandemic period has given way to renewed macro complexity.

We Saw This Coming – But Not This Quickly

Our January 2025 paper, Advisors’ Guide to the 2025 Stock Market: Optimism Now, Challenges Ahead, highlighted the risks of elevated valuations, policy uncertainty, and increased volatility. Yet this anticipated transition is unfolding faster than expected. Investor anxiety, trade friction, and tighter financial conditions are already reshaping markets dramatically.

Investors on High Alert

Volatility surged in Q1, with the CBOE Volatility Index (VIX) rising from below 15 to nearly 28, ending the quarter around 22. Markets anxiously anticipate a potential global trade war as tariff brinkmanship intensifies. In our opinion, equity investors must differentiate clearly between sectors and companies likely to benefit or suffer from evolving trade policies. Dispersion has become a central challenge in navigating equity markets. Upcoming Federal Reserve meetings in early May and mid-June will keep investors vigilant.

Advisors Must Lead the Shift

Given narrowing market leadership and mounting structural pressures, passive investment strategies may prove insufficient. Concentration, valuation, and volatility risks remain starkly elevated by historical measures. It is our view that this environment calls for active, risk-managed equity strategies designed to participate in upside gains while limiting downside risks and mitigating volatility. Diversification should extend beyond equities, emphasizing uncorrelated return sources such as global macro strategies capable of capitalizing on asset-class dislocations and global economic shifts.

Positioning Within Our Portfolios

The Catalyst/Welton Advantage Multi-Strategy Fund (CWEIX) is positioning for the current environment as follows:

• Risk-managed equity sleeve targeting controlled volatility.
• Systematic global macro approach seeking highly diversifying returns from actively trading commodities, currencies, fixed income, and global equity indices.
• A unified portfolio engineered for adaptability and resilience.

In markets where clarity may remain elusive, proactive and real diversification is, in our view, essential for better long-term client outcomes.

Fixed Income Outlook: Tariffs Unleashed

By Natalia Lojevsky, CIFC Asset Management. CIFC Asset Management is the sub-advisor to the Catalyst/CIFC Senior Secured Income Fund (CFRIX).

After an already turbulent start to the new year and a new Trump presidency, which quickly defied all investor expectations and sent financial markets and investor confidence plunging, the first week of April brought with it a global economic reordering that upended decades of post-WWII economic architecture and will likely reverberate for decades to come.

The sweeping changes impacting everything from trade, immigration, geopolitics, and longstanding government institutions coming out of Washington D.C. overwhelmed the markets, introducing unprecedented uncertainty. The breadth and speed of change, both domestically and geopolitically, stunned the world, as did the initial opening salvos of a trade war which were aimed not just at China this time, but also our closest regional trade partners, Canada and Mexico. And it was not just tariffs dominating the headlines.

Credit spreads, which had so far resisted most of the recession / stagflation narrative building up in equity markets began to show signs of stress. Investment grade spreads widened by 18 basis points (bps) to 114 bps. Much more pronounced weakness was felt in the high yield bond markets, where spreads widened by 100 bps to 457 bps, the most since the regional banking crisis in March 2023. To put that in context, high yield bond spreads are now ~150 bps wider than year-end 2024 and other recent tights. The impact to leveraged loans was lower but spreads also gapped out 45 bps to a 13-month wide of 503 bps. While both high yield bonds and leveraged loans experienced their largest setbacks in recent years, the credit markets remained orderly during the sell-off and were a relative port in the storm experienced by other risk assets. As substantial as these moves have been, credit spreads are still not yet pricing in a recession and are currently back at the averages for the past decade. We believe this can change should the tariff aftershocks persist for an extended time. Elsewhere in fixed income, Treasuries have been faring well, with the 10Y yield dropping by 25 bps, falling below 4% before comments from Chairman Powell that he was concerned about potentially bigger than expected inflationary impacts from the tariffs pushed it off the lows.

There are many questions the markets will have to contend with in the coming quarters as they continue to recalibrate to more U.S. policy shifts and reassess both U.S. and global growth prospects. In our opinion, investors need to be prepared for ongoing volatility on the path forward in the near term, and one where monetary policy may not be as supportive as is currently being priced. Technical pressures may also present a greater challenge than fundamentals as the current period of assessment plays out. While some assets appear affordable, we are continuously reviewing projections to determine appropriate valuations.

From a portfolio perspective, we continue to stick to our discipline in avoiding reactive decisions and advise investors to focus on the same approach. We are equally focused on staying defensive while closely evaluating positions to determine cash flow resiliency and credit fluctuation. We believe our direct exposure to material tariff risk is minimal; however, we are conducting further analysis of potential direct and second-order tariff impacts. Despite the sharp valuation shifts and dynamically evolving macroeconomic landscape, we continue to believe that credit and yielding assets offer better opportunities than many other asset classes today.

Spotlight on Alts: Energy Infrastructure

By Simon Lack, Founder of SL Advisors. SL Advisors sub-advises the Catalyst Energy Infrastructure Fund (MLXIX)

As we enter Q2, we see three powerful legs to the midstream energy story. They are demand growth for natural gas, attractive valuations, and the Trump administration’s support for traditional energy. It’s our belief that there’s too little appreciation of the underlying support from these three elements.

Part of the reason we’re optimistic about this sector is the growth of AI and the related infrastructure that will be needed to meet this demand. Last year the market began to appreciate the likely impact of new data centers on natural gas demand growth. Renewables remain a footnote in terms of actual U.S. power generation. Despite the headlines that are generated from solar and wind production, they account for only 16% of our electricity, while natural gas provides 43%.

We’re enjoying the Natural Gas Energy Transition because growth in production is eight times that of renewables over the past five years, ten years and for the 21^st century.

We’re also optimistic on the sector long-term, evidenced in part by the fact that S&P expects data centers to add between 3 billion cubic feet per day (BCF/D) and 6 BCF/D to gas demand by 2030.

It’s not just our own research pointing to this increased demand. Williams Companies expects power demand to grow at ten times the pace of the past decade. Much of this will be supplied by natural gas, but even where intermittent energy plays a role, it’ll require natural gas back-up because data centers don’t only run when the weather co-operates.

Increased LNG exports and pipeline sales to Mexico should add to industrial sector demand.

The demand for US LNG is supported by investments many importing countries have made in regassification facilities that allow them to convert gas from the near-liquid form in which it arrives by tanker back into the gaseous form required by users.

Cheniere notes that global regassification capacity is 2X the expected supply of LNG, which shows that demand is likely to be more than equal to supply over the next several years.

The positive demand story would be unremarkable if it was reflected in high valuations for midstream stocks, but it’s not. The S&P 500 trades at around 25X 2025 Factset EPS. Although valuation isn’t a good timing tool, this is historically not an attractive comparison with bonds.

As we often tell people, there’s no irrational exuberance present in this sector. Valuations and fund flows still exhibit excessive caution in our opinion. Completing the trifecta, we have a new administration that is fully behind U.S. oil and gas production. In his inauguration speech Trump even repeated “drill, baby, drill.”

An de-regulated environment may lower costs for Exploration and Production (E&P) companies, but in our opinion, signs are that increased output will need to be profitable.

Trends show that U.S. energy underpins America’s past decade of strong growth and rising living standards. As Germany has pursued its energy transformation (“Energiewende”), electricity prices have soared and manufacturing has slumped, all while global CO2 emissions have continued rising.

It is for those reasons we are optimistic about the energy infrastructure section moving forward in Q2 and beyond.

Past performance is not a guarantee of future results.

INVESTORS SHOULD CAREFULLY CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE CATALYST FUNDS. THIS AND OTHER IMPORTANT INFORMATION ABOUT THE FUND IS CONTAINED IN THE PROSPECTUS, WHICH CAN BE OBTAINED BY CALLING 866-447-4228 OR AT WWW.CATALYSTMF.COM AND WWW.RATIONALMF.COM. THE PROSPECTUS SHOULD BE READ CAREFULLY BEFORE INVESTING. NORTHERN LIGHTS DISTRIBUTORS, LLC (“NLD”) IS THE DISTRIBUTOR SOLELY FOR THE CATALYST MUTUAL FUNDS AND RATIONAL MUTUAL FUNDS. NLD HAS HAD NO ROLE IN THE STRUCTURING OR DISTRIBUTION FOR ANY OTHER INVESTMENT PRODUCTS REFERENCED HEREIN, AND IS NOT RESPONSIBLE FOR THE MARKETING OR PROMOTIONAL MATERIAL RELATED TO THE OTHER INVESTMENT PRODUCTS PRODUCED OR SPONSORED BY ANY OTHER FIRM. DAVID MILLER, STRATEGY SHARES, DR. PATRICK WELTON, DR. FRANÇOIS CHEVALLIER-GRAVEZAT, PHD, WELTON INVESTMENT PARTNERS, NATALIA LOJEVSKY, CIFC ASSET MANAGEMENT, SIMON LACK, AND SL ADVISORS ARE NOT AFFILIATED WITH NORTHERN LIGHTS DISTRIBUTORS, LLC.

Risk Considerations

Investing in the Funds mentioned above carries certain risks. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Investments in foreign securities could subject the Fund to greater risks including, currency fluctuation, economic conditions, and different governmental and accounting standards. The Fund’s portfolio may be focused on a limited number of industries, asset classes, countries, or issuers. The Fund may invest in high yield or junk bonds which present a greater risk than bonds of higher quality. Other risks include credit risks and interest rate for Floating Rate Loan Funds. Changes in short-term market interest rates will directly affect the yield on the shares of a fund whose investments are normally invested in floating rate debt. Floating Rate Loan Funds tend to be illiquid, the Fund might be unable to sell the loan in a timely manner as the secondary market is private, unregulated inter-dealer or inter-bank re-sale market. These factors may affect the value of your investment.

The advisor’s judgments about the growth, value or potential appreciation of an investment may prove to be incorrect or fail to have the intended results, which could adversely impact the Fund’s performance and cause it to underperform relative to other funds with similar investment goals or relative to its benchmark, or not to achieve its investment goal.

There is no assurance that these opinions or forecasts will come to pass, and past performance is no assurance of future results.

There is a risk that issuers and counterparties will not make payments on securities and other investments.

Glossary:

Bloomberg Commodity Index – designed to be a highly liquid and diversified benchmark for commodity investments.

Bloomberg US Aggregate Bond Index: A market capitalization-weighted index that is designed to measure the performance of the U.S. investment grade bond market with maturities of more than one year.

Bullish – Optimistic about the future trajectory of financial markets.

Commodities – a basic good used in commerce that is interchangeable with other commodities of the same type. Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.

Consumer Confidence Numbers – Economic indicators that reflects how optimistic consumers are about the economy and their personal finances.

Credit Spreads – The difference in yield (return) between two debt instruments of the same maturity but with different credit ratings, reflecting the additional risk investors take on when lending to a borrower with a lower credit rating.

Currencies – as money in the form of paper and coins that’s used as a medium of exchange. Currencies are created and distributed by individual countries around the world.

Delta of GDP – Refers to the change or difference in Gross Domestic Product

Earnings Per Share – A financial metric that measures a company’s profitability by indicating how much profit is allocated to each outstanding share of common stock. It’s calculated by dividing a company’s net income by the number of outstanding shares.

Equity Sleeve – a portion of a portfolio, often a sub-account within a larger investment account, that is specifically allocated to equity investments.

MSCI EAFE Gross TR USD Index – a broad market equity index that tracks the performance of large and mid-cap companies in 21 developed markets around the world, excluding the US and Canada.

Peak to Trough – The high and low points, or ups and downs, in a sequence or cycle, often used to describe the fluctuations in markets

2025 FactSet EPS – In the context of FactSet, Earnings Per Share (EPS) is a key financial metric indicating a company’s profitability on a per-share basis. It’s calculated by dividing a company’s net income by the total number of outstanding shares. FactSet uses EPS data to analyze and track company performance, estimate value, and provide insights for financial professionals and investors.

S&P 500 TR Index – A market capitalization-weighted index that is used to represent the U.S. large-cap stock market.

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