The “TACO” trade — shorthand for Trump Always Chickens Out — has increasingly shaped positioning.
Each bout of geopolitical-driven selling has become progressively more muted since April 2025.
The market’s growing confidence is also raising a new question: what happens if markets stop acting as a constraint on Trump?
Wall Street thinks it has President Donald Trump’s brinkmanship figured out — and is trading it accordingly. A growing cohort of investors has come to believe Trump ‘s escalation tactics follow a familiar script. The so-called TACO trade — shorthand for Trump Always Chickens Out — has increasingly shaped positioning, with traders treating escalation itself as a buy signal, stepping in on weakness in anticipation of an eventual off-ramp. Trump paused planned strikes on Iran just minutes before an 8 p.m. ET deadline, halting a five-week conflict that had disrupted a crucial global energy artery. Stocks surged and oil prices tumbled following the announcement, but market positioning leading into it suggested investors had already anticipated the move. The S & P 500 had just posted its first weekly gain in six, rising 3.4%, while volatility markets showed little sign of stress. S & P 500 options reflected only a modest risk premium into the deadline, according to Barclays. Earlier Tuesday, Trump warned that “a whole civilization will die tonight, never to be brought back again.” Yet the S & P 500 eked out a modest gain on the day, underscoring how investors have grown accustomed to looking through increasingly extreme threats. “I think what we have seen is President Trump tends to offer up or threaten maximalist position. And what the market is learning is, the more extreme the position is, the more likely a compromise is going to occur,” said Ed Mills, managing director and Washington policy analyst at Raymond James. That view has been reinforced by widely circulated frameworks, including analysis from The Kobeissi Letter , which outlines a repeatable cycle: escalation sparks market stress, pressure builds, and de-escalation ultimately drives a sharp rebound in risk assets. “Systematic investors are operating in what may be the most profitable market conditions in history right now,” Adam Kobeissi, founder of The Kobeissi letter, said in an X post. Each bout of geopolitical-driven selling has become progressively more muted since April 2025, with dips growing shallower as investors increasingly lean into the TACO trade and position for a quick reversal. Many see parallels with the U.S.-China trade conflict, where tariffs climbed to 145% alongside a series of escalating restrictions that ultimately proved unsustainable in the eyes of the market. “It’s probably a mix of complacency and confidence,” the Mizuho trading desk wrote in a note Tuesday afternoon. “Investors aren’t ignoring the risks, but they’re clearly leaning on history.” ‘Dangerous game’ Strategists have also been skeptical that the most extreme escalation paths were ever likely. Adam Crisafulli of Vital Knowledge wrote earlier this week that options such as a broader military campaign or major disruption to the Strait of Hormuz carry significant costs and diminishing returns, making an eventual off-ramp the more probable outcome. But the market’s growing confidence is also raising a new question: what happens if markets stop acting as a constraint? A market that no longer punishes aggressive rhetoric risks removing a key check on policy, potentially emboldening further brinkmanship. “I think it absolutely followed a traditional pattern, and I think that it is a dangerous game that gets played,” said Mills. “Oftentimes the market has needed to be the governor on his actions, and the lack of a market reaction yesterday was a potential warning that it did not necessarily really play its traditional role.”
