Can Investors Keep Counting on the TACO Trade?

David Marino-Nachison

Mon, Jul 14, 2025, 11:32 AM 3 min read

• Concerns about tariffs have had a relatively modest impact on stocks recently, as investors bet that President Trump will ease up on trade policies the market views negatively.

• The economic headwinds that tariffs are expected to create have yet to materialize. Investors will be looking for signs of stress in upcoming economic data releases and corporate earnings reports.

• Uncertainty around trade policy is likely to continue being an important factor driving market sentiment.

Stocks have climbed well off their post-Liberation Day lows, a sign that investors have moved past the trade-related concerns that led to those lows in the first place. They could be right—but some investors say that waving aside trade matters is a risky bet.

The European Union and Mexico are among the latest trade partners to face renewed pressure from President Donald Trump as he continues to push countries to accede to his demands regarding a range of policies–including, in Brazil’s case, domestic affairs. His latest actions have weighed on shares somewhat in recent sessions, but not dramatically so. (Read Investopedia’s full coverage of Monday’s trading here.)

“The market has not treated the recent tariff escalation as a negative catalyst at all, as it was very predictable, with the expectation that a relent will come eventually,” Deutsche Bank analysts wrote Friday. That commentary alludes to the so-called TACO Trade, which posits that Trump will ultimately ease up on trade policies the market views negatively.

While companies, economists and investors all believe that the tariffs as announced at any given moment could prove a substantial headwind to the economy, those winds have yet to pick up. Tomorrow’s CPI report for June could offer a fresh view of those effects, as could second-quarter earnings and U.S. retail sales data.

And some market watchers believe those effects will surely arrive eventually. “We believe tariffs remain the key risk to corporate profits in the second half of the year and are less concerned about geopolitical events or the outlook for fiscal and monetary policy,” ClearBridge Investments CIO Scott Glasser wrote last week.

ClearBridge expects the average effective U.S. tariff rate to land in the range of 14% to 15% as deals with large trade partners take a while to crystallize and levies on smaller ones remain in the meantime.

“To date, the impact on both growth and inflation has been muted by existing inventory and a fear of backlash for raising prices," Glasser wrote. "However, conversations with corporate management teams tell us that while they are willing to absorb some cost, prices are likely to rise in the coming months as pre-tariff inventory is absorbed.”