By Ian Salisbury

The so-called TACO trade -- or Trump Always Chickens Out -- has been working for investors. It might have room to run.

The trade is effectively a bet that the president will ultimately scale back in trade negotiations and other dealings to avoid a major hit to U.S. markets or the economy. For his part, President Donald Trump has dismissed the label, describing a reporter's question about it as "nasty."

The S&P 500 is on something of a winning streak, posting gains on six of the last seven days. So far this year, the index has returned 3.4%, including an essentially flat performance on Wednesday. The solid -- if unremarkable -- returns hide the nearly 20% top-to-bottom drop in response to this spring's trade chaos. The rebound is largely thanks to the market's conviction that Trump won't let aggressive trade rhetoric send the U.S. into a recession.

Recent events suggest Wall Street might be right. On Wednesday, Trump said the U.S. and China had reached a trade deal. While details are still scarce, the president indicated (in an all-caps Truth Social post) that the deal would include 55% tariffs on Chinese imports -- while allowing the U.S. to purchase rare minerals from China and for Chinese students to attend U.S. colleges.

Whether or not the deal turns out to be a long-term winner, the agreement should remove a cloud of uncertainty -- what the market always hates most.

Other indicators are also looking positive. The Bureau of Labor Statistics' latest inflation report, released Wednesday, showed prices rose just 2.4% last month on an annual basis. The result, just below economists' forecast for 2.5%, suggested tariffs that are in place haven't been having much of an impact on American's wallets.

With investors regaining confidence, the market's price-to-earnings ratio has been climbing fast. The S&P 500 currently trades at 21.5 times forward earnings, up from just 18 times a little over a month ago.

Does that leave room for the index to rally still further? Plenty of market watchers think it does. In a report Wednesday, DataTrek Research conceded that U.S. market valuations are higher than almost any point since the Dot-Com bubble. But the firm concluded this was justified by outsize profit growth at large U.S. tech firms, which dominate U.S. stock indexes.

"U.S. big tech companies are collectively much better businesses than their international peers and Gen AI gives them a pathway to continue in the same vein," the firm wrote.

Market research firm Yardeni, meanwhile, noted that most analysts on Wall Street remain bullish when it comes to profits -- an attitude that could justify additional stock market gains. Analysts' forecasts for the S&P 500's next-12-month's operating profits recently hit a record high of $279 a share, Yardeni said in a note Wednesday.

Those forecasts had steadily been marching northward until early April, when Trump's "Liberation Day" tariff announcement checked their progress. Still, the tariff uncertainty, which sent stock prices reeling, delivered a much smaller hit to earnings forecasts. These slipped only about 1% from their peak before beginning a recovery.

The contrast with much more significant stock price declines suggest it was uncertainty that led to the market's big selloff -- rather than a strong conviction that tariffs would crimp earnings.

Now that the market seems to firmly believe that "Trump Will Always Chicken Out," that uncertainty has faded.

Write to Ian Salisbury at ian.salisbury@barrons.com

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June 11, 2025 13:48 ET (17:48 GMT)

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