Important points
Wall Street believes it understands President Donald Trump’s brinkmanship and is trading accordingly. A growing group of investors believes that Trump’s escalation strategy follows a familiar scenario. So-called TACO trades (TACO stands for Trump Always Chickens Out) are increasingly shaping positioning, with traders treating the escalation itself as a buy signal and tapping into weakness in anticipation of an eventual decline. President Trump paused a planned attack on Iran just minutes before the 8pm ET deadline, halting a five-week conflict that has disrupted the world’s vital energy artery. Stocks soared and oil prices fell following the announcement, but market positioning leading up to the announcement suggested investors had already expected the move. The S&P 500 just posted its first weekly gain in six weeks, rising 3.4%, but the volatile market showed few signs of stress. Barclays says S&P 500 options reflect only a small risk premium by expiration. Earlier on Tuesday, President Trump warned that “an entire civilization will perish tonight, and it will never rise again.” Still, the S&P 500 rose modestly on the day, underscoring how accustomed investors are to identifying increasingly extreme threats. “What we’ve seen is that President Trump tends to offer or threaten maximalist positions,” said Ed Mills, managing director and Washington policy analyst at Raymond James. “And what the market is learning is that the more extreme the position, the more likely it is that compromise will occur.” This view is strengthened by widely circulated frameworks, including analysis from The Kobeissi Letter, which outlines a repeatable cycle in which escalation causes market stress, pressure builds, and de-escalation ultimately causes a sharp rebound in risk assets. “Systematic investors are currently operating in what appears to be the most profitable market environment in history,” Adam Cobissi, founder of Cobissi Letter, said on XPost. Since April 2025, the geopolitical sell-off has gradually subsided and the decline has become shallower as investors increasingly lean towards TACO trading and look for quick reversals. Many see parallels with the US-China trade war, where tariffs rose to 145% alongside a series of regulatory tightening that ultimately proved unsustainable in the eyes of the market. “This is likely a mixture of complacency and confidence,” Mizuho Trading Desk wrote in a note Tuesday afternoon. “Investors are not ignoring risk, but they are clearly relying on history.” “A Dangerous Game” Strategists are also skeptical that the most extreme path to escalation yet is possible. Vital Knowledge’s Adam Crisafulli wrote earlier this week that options such as broader military operations or major disruption to the Strait of Hormuz would come with significant costs and diminishing returns, ultimately resulting in a more likely withdrawal. But rising market confidence also raises new questions: What happens when markets no longer act as constraints? If markets no longer punish aggressive rhetoric, an important check on policy will be removed and brinkmanship could become even stronger. “I think it followed a completely traditional pattern and I think it’s a dangerous game,” Mills said. “Often the market needed to be governor about the governor’s actions, but the market’s failure to react yesterday was a potential warning that the governor is not necessarily playing the traditional role.”
