U.S. stocks are sliding toward a correction zone. Previously, investors firmly believed that former President Trump would soften his policies in response to significant market declines. However, with escalating conflicts in Iran, oil prices surpassing $100 per barrel, and persistent high inflation, this market logic is now failing, making a recovery increasingly difficult.

As U.S. stock indices near correction levels, a once-reliable Wall Street strategy—the "TACO trade"—is facing an unprecedented crisis of confidence. Influenced by the intensifying Iran conflict, soaring global energy prices, and stubborn inflation, the three major U.S. stock indices have fallen significantly from their recent peaks. According to FactSet data, the S&P 500 has declined 6.8% from its January peak, while the Dow Jones Industrial Average and the Nasdaq Composite have dropped 9.2% and 9.6%, respectively.

By market convention, a decline of 10% marks entry into a "correction zone," and a drop exceeding 20% signals the end of a bull market and the start of a bear market. Currently, the tech-heavy Nasdaq and the Dow Jones are teetering on the brink of correction.

The concept of the "TACO trade" originated during the sell-off in April of last year, dubbed the "Liberation Day" downturn. At that time, the Trump administration announced tariffs on most trading partners, triggering market panic. However, following sharp stock market reactions, the government postponed several tariff measures.

Since then, Wall Street adopted a golden rule: instead of panic-selling due to Trump's aggressive policies or military actions, investors viewed such events as buying opportunities. They anticipated that Trump, who closely ties his political success to stock market performance, would soften his stance or reverse policies to protect his "stock market gold medal" whenever indices fell sharply.

Although historical data suggests that the S&P 500 often delivers substantial medium-to-long-term returns after a 5% decline, the current macroeconomic environment casts doubt on this pattern. First, the damage from military conflicts cannot be easily undone. Chris Maxey, Chief Strategist at Wealthspire, noted that while tariff policies can be reversed with a single document, direct attacks on Middle Eastern energy infrastructure and potential blockades of the Strait of Hormuz represent physical destruction likely to sustain high oil prices. If crude oil remains above $100 per barrel, a V-shaped market recovery becomes improbable.

Second, economic fundamentals are weaker. Compared to 2025, the current U.S. labor market is softening, and inflationary pressures persist. Debbie Hippensteel, Portfolio Manager at River Wealth Advisors, suggested that although investors continue to anticipate a policy shift from Trump, the longer and deeper the conflict persists, the harder it will be to escape the crisis.

Currently, signals from the White House remain contradictory: on one hand, officials hint at de-escalation, while on the other, additional naval forces are deployed to the Middle East. Tony Rodriguez, Head of Fixed Income Strategy at Nuveen, pointed out that with midterm elections approaching, sustained high energy prices are becoming a political liability for the administration. This may force the Trump government to seek an "exit strategy" from the conflict.

Even if Trump ultimately reverses course, the path to market recovery remains challenging. Maxey warned that current inflation concerns have eroded market support, and a mere policy shift may no longer suffice to rescue the economy. "What we need is a complete cessation of hostilities and a decline in oil prices," he emphasized.

Faced with a faltering "TACO trade" and unpredictable geopolitical risks, Wall Street is holding its breath.