Here’s a short list of things that keep us awake at night.

• We anticipate significant market turbulence this summer, driven by the Treasury’s “X-Date” debt ceiling deadline. While rate and currency volatility have declined 5% year-to-date, equity volatility remains elevated (VIX is at 21), and credit volatility spreads have widened 16%, signaling some continued market stress under the surface.

• Historical analysis suggests stock market bottoms typically form only after the number of days of extreme VIX moves (+/-1 standard deviation) decline from the prior quarter. There have been 24 days of extreme VIX moves during 2Q, well above the 15 days recorded during 1Q. Therefore, we cannot rule out the possibility of the S&P 500 testing new year-to-date lows before finding support.

• Our base case assumes a nominal GDP growth of 5% in the coming years, characterized by below-trend real growth and persistently elevated inflation. We believe this higher inflation environment is necessary to help reduce the burden of $36 trillion in federal debt in current dollars. For this reason, we see any summer equity selloff as an opportunity to buy.

• The market is confident that the Fed will cut rates twice this year and twice in 2026. What if the Fed stays on hold through year-end? This aligns with our 5% nominal GDP thesis (1.8% real GDP and 3.2% inflation) and suggests current market pricing may be overly dovish.

• The consensus expects the 10-year Treasury yield to end the year around 4.25% (currently 4.38%). What if the economy is stronger than expected? Like Fed funds expectations, nobody is positioned for a 5% 10-year yield, which aligns with our 5% nominal GDP thesis. The sharp spike in Japanese government bond yields reminds us that inflation is not always made in America, and US yields remain tethered to global bond markets.

• The timely passage of the One Big Beautiful Bill remains critical to our nominal GDP growth projections. However, ongoing political gridlock threatens the July 4 deadline. We think a likely scenario is passage in early August. A worst-case scenario would be a delay in the bill’s enactment until December 31, 2025, creating significant headwinds for portfolio returns in the second half of this year.

MACRO VIEWS

Growth Outlook

US growth confronts a “wall of worry” including higher oil prices, immigration restrictions, tariffs, resumed student loan payments, declining residential construction, and elevated interest rate premiums. Despite these headwinds, we believe consumption strength and potential policy “candy” from tax cuts and deregulation will prove offsetting. RiskBridge has raised its 2025 GDP forecast to 1.8%, above the FOMC’s conservative 1.4% projection, reflecting labor market resilience and improving trade policy sentiment.

Labor Markets

The FOMC expects unemployment to rise from 4.2% to 4.5% by year-end, maintaining near-full employment conditions. The labor market has achieved a rough balance with 7.4 million job openings against 7.2 million unemployed workers. However, rising jobless claims signal loosening dynamics, with initial claims at 245,000, 8% above the 2025 average.

Inflation Dynamics

While 5-year forward inflation expectations have risen above their 200-day average, they remain well below 2024 peaks. The Philadelphia Fed’s prices paid component fell sharply for current conditions, but the 6-month outlook reached its highest level since April 2022. We forecast core PCE inflation rising to 3.25% over the coming year, supporting our higher-for-longer Fed policy view.

Monetary Policy

The Fed held the effective Fed funds rate steady at 4.33% last week, amid FOMC divisions on future cuts. Markets grow increasingly anxious awaiting the next FOMC Chair announcement, with speculation that the most qualified candidate may no longer be viable. Monetary policy and Fed independence remain material uncertainties.

Fiscal Policy Transition

Following the fiscal “spinach” (DOGE, immigration, tariffs) in the first half of the year, Congress now focuses on policy “candy” by extending expiring tax cuts and banking deregulation. We expect an early August enactment, though sequencing matters. The fiscal package’s positive growth effects will likely be smaller and later than tariff drags, while tariff revenues partially offset deficit increases.

Weak Macro Momentum

Recent US data has weakened notably, with the Citi Economic Surprise Index plummeting from +12 to -23 in June, underscoring near-term growth uncertainties despite our constructive medium-term outlook.

PORTFOLIO POSITIONS

US Equities:   Neutral

The S&P 500 has shown remarkable resilience, trading just 2.8% below its February 19 record high. However, the margin of safety is reduced as US stocks appear fully valued at current levels, with continued reliance on historically high profit margins.

Since “liberation day,” the S&P 500’s 2-month momentum exceeded 10% according to 3Fourteen Research, while the percentage of AAII bears exceeded bulls. This rare combination of positive momentum and negative sentiment (1.1% of the time) demonstrates skepticism in the rally.

The next challenge lies in the upcoming earnings season. Despite Q1’s better-than-expected results, analysts have aggressively cut Q2-Q4 estimates, spooked by policy uncertainty’s negative impacts. Encouragingly, the 2026 consensus S&P 500 EPS estimate appears to be bottoming around $300 per share (source: FactSet), suggesting that forward earnings could soon reach new highs.

Our sector recommendations favor overweighting Communication Services, Financials, and Health Care. The latter, we believe, is poised for a breakout on an absolute and relative basis. These sectors benefit from secular tailwinds and policy support from the new administration.

Large-caps remain direct beneficiaries of flow-driven optimism and natural resilience through strong cash generation. Given heightened policy uncertainty and inflation expectations weighing on Growth shares, particularly amid concerns around AI capex spending and softer consumer data, our focus has shifted to value (overweight) versus growth (underweight).

Mid-caps warrant an overweight allocation due to attractive valuations relative to large-caps and strong domestic revenue bases that provide stability amid trade tensions. This represents a key component in our active thematic allocation, focusing on high-quality, smaller-cap names offering diversification from concentrated large-cap indices. Primary risks to US equities include a protracted economic soft patch that would pressure small caps given their elevated growth sensitivity, persistently elevated interest rates creating headwinds for smaller companies, and any decline in bond yields potentially favoring Growth over Value shares in the intermediate term.

International Equities:          Overweight (+1) 

Despite recent headwinds, we maintain an overweight allocation to emerging markets, viewing current valuations as attractive relative to developed market peers. Our positioning reflects confidence in long-term structural growth drivers and improving fundamentals across key regions.
 
Emerging market equities have faced pressure from elevated US interest rates and geopolitical tensions. However, many economies demonstrate resilient domestic demand, improving current account balances, and reduced external financing vulnerabilities compared to previous cycles. China’s policy pivot toward pro-growth stimulus measures provides additional support for the broader asset class.

Our overweight stance capitalizes on attractive valuations following the recent selloff, with many markets trading at significant discounts to historical averages. Additionally, emerging markets offer essential diversification benefits and exposure to secular growth themes, including infrastructure development, technological advancement, and demographic transitions. Primary risks include prolonged dollar strength, escalating trade tensions, and a slower-than-expected Chinese economic recovery that could impact regional growth prospects.

Fixed Income:              Underweight (-4%)

We remain underweight duration (roughly 5.5 years vs. the benchmark’s 6.2 years), Treasuries, and MBS, and overweight high yield, emerging market debt, and cash. Given our 5.0% nominal GDP growth outlook, we prefer credit risk over interest rate risk in fixed-income allocations.

Ten-year Treasury yields have declined 17 basis points year-to-date amid trade, fiscal, and geopolitical policy uncertainties. This trend should persist until policy clarity emerges, potentially influencing Federal Reserve decisions. We anticipate the eventual end of quantitative tightening and a more accommodative regulatory environment supporting Treasury prices. Our duration positioning remains tactical—increasing exposure as rates approach upper ranges and reducing it near lower bounds.

The corporate debt outlook remains constructive in the short term, supported by solid fundamentals and technical conditions. However, earnings and credit quality concerns have increased volatility, driven by economic uncertainty, trade tensions, and monetary policy shifts. Investment-grade spreads remain elevated with widening bias, creating selective opportunities. Investment-grade spreads have widened amid tariff uncertainties and heavy issuance. We prefer higher-quality issuers with pricing flexibility, negotiating power, diversified sourcing, and strong management. If spreads continue widening, we maintain liquidity to capitalize on relative value opportunities.

Recent comments from Treasury Secretary Bessent and FHFA Director Pulte suggest serious efforts to transition GSEs from conservatorship, though specifics remain unclear. Current pricing assumes continued government backing for GSE-issued MBS.

We expect credit (investment-grade and high yield) and emerging market debt to outperform government bonds and broad bond indices. Our preference remains carry-focused strategies that do not compromise quality for yield.

Diversifiers    Overweight (+3%)  

We expect central bank buying and safe-haven demand to continue supporting gold prices, structurally resetting the gold-to-silver ratio beyond where silver can catch up. Our primary diversifier position is in the form of managed futures, which provide low correlation to publicly traded stocks and bonds and the potential for crisis protection during traditional asset market drawdowns.

CONCLUSION

The market landscape ahead presents a complex tapestry of challenges and opportunities requiring sophisticated portfolio positioning. Our outlook for sustained 5% nominal GDP growth, driven by structural inflation and fiscal dynamics, suggests investors should prepare for an environment markedly different from the post-financial crisis era of ultra-low rates and subdued price pressures.

The anticipated summer volatility around the debt ceiling, our contrarian views on Federal Reserve policy, and rising long-term yields underscore the importance of defensive positioning alongside selective risk-taking. While we view potential equity selloffs as buying opportunities within our higher inflation framework, the path forward will likely test traditional portfolio construction approaches.

We recognize portfolio diversification must evolve beyond conventional stock-bond allocations. Managed futures have demonstrated crisis alpha and low correlation characteristics, making them particularly compelling as we navigate an environment where traditional diversifiers may prove inadequate.

Success in this evolving landscape requires dynamic portfolio management that balances conviction-weighted positioning with robust risk controls. Policy uncertainty, structural economic shifts, and elevated market volatility demand a thoughtful approach to asset allocation.

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Investment Advisory Services offered through RiskBridge Advisors, LLC d/b/a Finley Davis Private Wealth (“RiskBridge”) (RB) or Lion Street Advisors, LLC (LSA),registered investment advisers with the SEC. Registration does not imply a certain level of skill or training. Securities offered through Lion Street Financial, LLC (LSF), member FINRA & SIPC, through Finley Davis Financial Group, Inc. (FDFG). RB and FDFG are not affiliated with LSA or LSF.

The opinions / strategies above are for general information only, are not intended to provide specific advice or recommendations for any individual and may not reflect those of Lion Street Financial LLC. Diversification does not guarantee profit or protect against loss. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

Past performance is no guarantee of future results. Personnel of Risk Bridge Advisors, LLC (“RiskBridge”) prepared this material. The views expressed herein do not constitute research, investment advice, or trade recommendations. RiskBridge may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof.

S&P500® Index is a market capitalization-weighted index of 500 of the largest U.S. companies, designed to measure broad U.S. equity performance.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. Trading futures involves the risk of loss and is not suitable for all investors. Please consider carefully whether futures are appropriate to your financial situation.