For all the force with which the second Trump Administration has come to office, leaving convention at the door, we believe investors should largely focus on a small handful of important areas to separate news from noise in the pursuit of portfolio returns.

First on the list remains Inflation.  While the Y/Y rate of change in the headline price level has shuffled sideways at a generally acceptable – if not slightly above target – ~3% rate for much of the last year, several factors that could put upward pressure on prices in the intermediate-term bear watching.  Tariffs are the headline grabber.  As foreshadowed during the campaign, the Administration is clearly comfortable implementing (or, at least, threatening to implement) significant levies on U.S. trading partners.  We believe their use will come in three forms: 1) as levers to achieve largely non-economic concessions in furtherance of the President’s hemispheric and national defense  “Trump Doctrine” ambitions, e.g., Greenland, the Panama Canal, Columbia, Canada & Mexico; 2) as levers to achieve decidedly “America First” economic ends (a Day 1 executive order requested a study from the departments of Treasury and Commerce and the USTR’s office on their use); and, 3) related to China.  Said simply, in a world with free trade there is no room for exceptions; goods flow freely among trading partners and generally conform to the natural and binding laws of economic supply and demand.  In a world where the natural constraints of supply and demand are manipulated via policy, the negotiation of exceptions becomes the modus operandi.  President Trump likes to negotiate.  This is the new normal.  We believe the Administration to generally be in favor of free trade, but we believe they view the current paradigm as generally favoring the rest of the world.  Tariffs are their means to the end of righting this wrong.  When tariffs are in place and their offsetting exceptions negotiated, the impact on prices will become clearer.  On balance, tariffs are inflationary in the near-to-intermediate-term.  Arguments can be made about exporter assumption, price adjustment and currency effects.  Regardless, we are evidencing the acceleration of De-Globalization, which we view as the breakdown (however catalyzed) of long-held geo-political operating conventions.  This remains an important theme in our work and one of four themes currently constituent in the Strategas Macro Thematic Opportunities ETF (NYSE:SAMT). 

Grabbing less attention in the financial press but no less important for the inflation outlook is the Administration’s immigration policy and specifically, its actions to deport large numbers of foreign nationals deemed to be in the U.S. illegally.  Irrespective of one’s political views on the topic, empirical data would suggest that removing many people from the labor force, particularly those who fall in the lower quartiles of the income distribution would put notable upward pressure on wages in an economy growing above trend (which the U.S. is).  We view the impact of immigration policy as a more pressing near-term consideration for the inflation outlook and the volatility of inflation expectations.  It should be noted, many components of headline price measures are slow moving, e.g., housing, and are not showcasing the sharply upward trends that could increase inflation.  Should all the building blocks conspire to lift the general price level we believe it to be more a late-’25 or 2026 story than a 1H’25 concern.  By our lights, the Fed remains inclined to lower the Fed funds policy rate.  We believe they may do so twice more this year (once in June and again in November or December); the futures market believes it will do so three times. 

As the market waits for signposts on inflation, second in the list is Earnings & Valuation.  Using the S&P 500 as a proxy, corporate profits finished 2024 on a strong note, up +10.5% Y/Y.  The outlook for 2025 is no less 2/7/2025optimistic.  Street analysts are estimating Index earnings to grow +13.3% in 2025.  My colleagues and I are bullish on the prospect for corporate operators to deliver, albeit at a slightly more modest rate (+8% Y/Y).  The impact of higher raw and intermediate good procurement and rising labor costs is likely to weigh on the consensus’ outsized expectations for operating margin expansion.  Moreover, the highly concentrated construction of the Index requires near-asymptotic follow through from its most dominant weights, i.e., the Mag 7.  While earnings strength has broadened over the last several quarters, results from the largest companies have moderated on continued capital investment (A.I.) and softer revenue growth.  Despite this, the market’s optimism has barely wavered.  Enthusiasm for the Administration’s pro-business/pro-growth/de-regulatory policy platform has stirred animal spirits and pushed multiples to the upper end of their historical range.  If history is a guide, the return profile for new money invested at prevailing valuation levels is not stellar.  So, the ability of corporate operators, particularly global franchises, to navigate a volatile operating environment, continue to build the revenue stack and mine operating leverage from a rising and/or volatile cost profile could well be the lever on which the market moves this year.  We’re optimistic but mindful that in an economy which appears to have entered its late-cycle phase and with an investor class eager to see a third consecutive year of +20% equity returns, the burden of proof is high and not particularly deserving of a long leash.  Thematically, we continue to favor companies with optionality, specifically generators of good cash flow.  As we’ve written in these pages previously, there are basically seven outlets for corporate cash: three to return it to investors (dividends, debt retirement, and share repurchases); three to invest in the franchise (acquisitions, capex, and labor – pay labor more or pay more labor); and, if all of those decision points are taken tomorrow, then companies have free cash flow.  S&P P/FCF is, interestingly – and importantly – not at the upper end of its historical range like other valuation metrics.  These Cash Flow Aristocrats comprise another one of the four themes currently constituent in the Strategas Macro Thematic Opportunities ETF (NYSE:SAMT). 

Third on the list is Taxes.  It would not be hyperbole to suggest that 2025 may be the most important year for tax policy since 1913 and introduction of the personal income tax.  The list of provisions, range of impact, and the notional dollars considered, coupled with myriad economic viewpoints and the number of special interest constituencies, vying for mindshare with an ideologically divided though narrowly whipped Congress is likely to make for a protracted and uncertain process.  But deadlines loom and Treasury Secretary Scott Bessent has voiced concern for the general health of the economy should the estimated $3.5 to $5.0 trillion of expiring cuts not be extended.  The President is inclined toward a single “big, beautiful bill.”  Senate Finance committee chair Mike Crapo (R-ID) is growing impatient with the House and, perhaps keen to deliver an early victory for the President, is authoring a two-bill strategy.  This could leave key pieces of the President’s agenda to be litigated in the mid-terms (which is a tall mountain).  Speaker Mike Johnson (R-LA) isn’t purposefully dragging his feet; he doesn’t have the votes.  With only a handful of seats to claim majority, the Speaker is weak to his right and wary of the fate of previous Republican speakers who found the path to legislative victories paved with Democratic votes.  (Spoiler… those previous Speakers are not Speaker anymore.)  If investors are not exhausted from the Election, the great tax debate will provide plenty of interesting political theater.  By our lights, we would caution investors to avoid the noise.  Few, if any answers are likely to be known until after Labor Day.

In the meantime, we remain generally constructive on equities.  With the U.S. bumping up against the debt ceiling, we continue to expect a notable injection of liquidity into the banking system.  Dan Clifton and Strategas’ liquidity guru, Chris McGrath, lamp the injection at $350-400 billion from the TGA in the run-up to tax season.  It is an opportunity, in our view, to make some portfolio adjustments, on strength, to attempt to inoculate the portfolio from any sign of weakness from the “perfection” trade.  Don’t allow noise to drive you to distraction.  Keep the list short. 

Nicholas Bohnsack