Trump’s tariff bluff and market realities

[UNITED STATES] The world’s financial markets have learned to read the room—or, more precisely, the Oval Office. As President Donald Trump bristled at a reporter’s question about Wall Street’s new “TACO” trade—short for “Trump Always Chickens Out”—he inadvertently spotlighted a defining feature of his second-term trade policy: the yawning gap between tariff threats and tangible action. Market analysts, traders, and even corporate executives now anticipate that the administration’s most aggressive tariff postures are likely to be walked back, creating a pattern of volatility that savvy investors are learning to exploit. This dynamic is reshaping how global markets react to American trade policy, with far-reaching implications for growth, inflation, and the credibility of U.S. leadership.

The TACO Trade: How Markets Learned to Play the Bluff

Wall Street’s “TACO” trade—coined by Financial Times columnist Robert Armstrong—captures a new reality: market participants now expect that President Trump’s most dramatic tariff threats will be reversed or delayed before they inflict lasting damage. The pattern is clear: markets plunge when new tariffs are announced, then rally sharply when the administration retreats, as seen after Trump’s recent threats of 50% tariffs on EU goods and 145% tariffs on Chinese imports, both of which were subsequently paused or reduced. This cycle has become so predictable that traders are actively “buying the dip” after each tariff scare, confident that relief will follow.

The data bears this out. After Trump announced the 50% EU tariffs on May 26—only to delay them to July 9—U.S. markets surged, with the S&P 500 rallying 2.1% on the first trading day after the Memorial Day holiday. Similarly, markets rebounded after earlier threats against China and other trading partners were dialed back. This pattern is not just a quirk; it has become a core part of market strategy, with cyclical sectors like consumer discretionary, technology, and energy seeing the sharpest rebounds after each tariff threat.

Uncertainty as Policy: The Economic Costs of Inconsistent Tariffs

While the TACO trade offers short-term opportunities for nimble investors, it comes at a steep cost for the broader economy. The constant churn of tariff threats and retreats has created a persistent climate of uncertainty, leading companies to delay investments, reduce hiring, and pull back on guidance. Major retailers such as Ross Stores and Deckers Brands have cited trade policy volatility as a reason for withdrawing full-year forecasts, while Apple and other tech giants have seen their shares whipsawed by tariff-related headlines.

The economic damage is measurable. The U.S. economy contracted by 0.3% in the first quarter of 2025, with heightened uncertainty and supply chain disruptions cited as contributing factors. Yale’s Budget Lab estimates that if Trump’s tariffs were left in place, they would reduce real GDP growth by 0.9 percentage points in 2025 and cause a sustained long-term reduction of 0.6%, translating to an annual loss of $180 billion in 2024 dollars. Consumer prices have already risen, with apparel up 17% and food prices up 2.6%, as companies pass on higher costs to consumers.

This volatility is not just a U.S. problem. Global markets, including those in Europe and Asia, have been roiled by Trump’s on-again, off-again trade policy, with indices like Germany’s DAX and France’s CAC 40 suffering sharp declines after each new threat. The resulting uncertainty complicates planning for multinational corporations and undermines confidence in the stability of U.S. economic leadership.

The Legal and Political Reckoning: Courts, Credibility, and the Future of Trade

The administration’s tariff strategy is now facing a legal reckoning. In late May, a federal court blocked many of Trump’s sweeping tariffs, ruling that he had exceeded his authority under emergency powers laws. The decision, which the administration has vowed to appeal, has added another layer of uncertainty to the trade landscape. Markets initially rallied on the news, with S&P 500 futures surging 1.5% and the dollar strengthening against safe-haven currencies.

But the court’s intervention is a double-edged sword. While it may temporarily slow the momentum toward a full-blown trade war, it also prolongs the uncertainty that has plagued businesses and investors. The administration’s insistence on using tariffs as a primary tool of economic statecraft—despite repeated legal and market pushback—raises questions about the long-term viability of this approach. As one analyst put it, the court’s ruling “paves the way for a confrontation that will likely escalate to the Supreme Court,” potentially setting the stage for a constitutional showdown over presidential authority.

Politically, Trump’s tariff bluster may be losing its bite. While the president dismisses the TACO trade as “negotiation,” the market’s reaction suggests that his credibility is being priced in—and discounted. The more often threats are walked back, the less seriously they are taken, both by trading partners and by investors. This dynamic could weaken the administration’s hand in future negotiations, as foreign governments and corporations grow accustomed to the pattern of escalation and retreat.

What We Think

The TACO trade is more than a Wall Street inside joke—it is a symptom of a deeper malaise in U.S. trade policy. While the administration’s willingness to walk back extreme tariff threats has spared the global economy from immediate catastrophe, it has also created a persistent climate of uncertainty that is weighing on growth, investment, and consumer confidence. The market’s ability to anticipate and profit from these reversals does not negate the real costs to businesses and households, nor does it restore the credibility of U.S. economic leadership.

Looking ahead, the legal challenges to Trump’s tariffs and the growing skepticism of his negotiating tactics suggest that the era of tariff-driven trade policy may be reaching its limits. For markets, the lesson is clear: volatility is the new normal, but the long-term costs of inconsistency are mounting. For policymakers, the challenge is to restore stability and predictability—not through bluster, but through coherent, sustainable trade strategies that inspire confidence at home and abroad.