Trump Won A Quiet Victory Over Markets

For much of President Donald Trump’s second term, investors used a four-letter mantra to make bets about his disruptive actions: TACO, short for “Trump always chickens out.”

The idea, coined by the Financial Times, was that traders shouldn’t act on the most drastic versions of Trump’s policy pronouncements because the president often walked them back in the face of backlash. The Liberation Day tariffs in April of 2025 threatened to destabilize the bond market and spurred a presidential retreat.

Yet as Trump approaches the midpoint of his term, there’s also mounting evidence that he has gotten the better of the markets.

And while the president hates the notion of TACO, he has privately made a similar point, a person familiar with the matter told me: It’s funny there is a perception that he caves to pressure when he tends to still end up in a much better place, from his perspective, than he started.

After all, for all his swerves and concessions, the president has not abandoned a global trade war that has fueled inflation or a stalemated conflict with Iran that has rattled oil markets.

And financial markets have become pretty zen about all of it.

Tariffs aren’t the only provocation to investors. There’s plenty of other global news to feed Wall Street’s imagination and whipsaw markets, from China’s development of artificial intelligence models that could rival U.S. ones, to the prospect of interest rate hikes by the Federal Reserve to combat a rise in prices.

But tariffs, which have upended supply chains, raised costs for businesses and fueled tension with foreign allies and adversaries alike? These days, they mostly just warrant a shrug from investors.

Last month, the Trump administration announced new import taxes of at least 10 percent on countries that make up the vast majority of U.S. trade. You might not have even noticed because the market reaction was so muted.

He has also threatened additional tariffs on Canada, which could take effect next week. That, too, hasn’t caused nearly the same consternation that other announcements did last year, when markets were constantly panicking about what tariff action Trump might take next.

The administration is still figuring out how to build a durable legal basis for global tariffs, after the original authority was nullified by the Supreme Court and then the subsequent authority expired last month. There’s still uncertainty about the final shape and durability of a Trump-authored tariff regime.

But while country-specific rates and the products targeted have shifted, tariff levels have generally settled at a predictable enough level, and investors seem to have largely decided they can live with that.

“To some extent the uncertainty was even more relevant than the actual level of the tariffs,” an economist at a large hedge fund told me. “Nobody really has doubts that this level of tariffs is now going to continue.”

Part of Wall Street’s relative calm is that tech spending fueling the buildout of AI infrastructure is driving stock indexes ever higher, drowning out tariff-caused weaknesses in sectors like retail. That doesn’t eliminate tariff angst, but it makes it a smaller factor in market thinking.

Another piece: The burden of tariffs has fallen disproportionately on small and medium-sized businesses, which aren’t part of the S&P 500.

Probably most importantly, the U.S. and China pulled back from the brink of a trade war that could have wrecked both countries. The stakes are simply lower for American investors in ongoing spats that threaten to push up prices on certain goods with double-digit taxes compared with the prospect of a full-on divorce between the world’s two largest economies.

But also, economic growth has remained resilient even in the face of the highest tariff levels in a century — far from a given two years ago.

In other words, Trump seems to have won this round in convincing markets they can live with 10 percent-plus tariffs.

“President Trump was right about tariffs — many such cases!” White House spokesperson Kush Desai emailed me.

This brave new world provides an important insight into the whole TACO concept.

It has long been obvious that TACO has its limits. In some respects, it is self-defeating as conventional wisdom: The consensus that Trump usually backed down muted market reaction to policy announcements, thereby easing the backlash that was often Trump’s main incentive to back down.

But investors’ recent calm after many months of turmoil also shows the core dynamic is more nuanced. Trump typically backs off economic policies only in response to extreme market reaction, and even then, only partially.

A similar market dynamic has been visible around the war in Iran, where Trump isn’t overly fazed by volatility as long as he can keep markets from full-on panic.

The question now is whether markets’ calm will hold.

Fears about inflation, fed by tariffs and the Middle East conflict, could spur the kind of surge in yields on U.S. government debt that markets won’t get used to.

After all, investors have every incentive to be forward-looking in their conclusions about where to put their money, but they’ll still change their minds if the data starts to turn.

It presumably won’t be enough to kill his tariffs, but it could easily kill his stock market rally.

Kevin Gordon, head of macro research and strategy at Charles Schwab, said tariffs might ultimately bite markets in another way, if they continue to keep prices elevated and spur the Fed to raise interest rates.

Administration officials and others, like former Fed Chair Jerome Powell, concluded last year that tariffs would likely cause one-time price hikes rather than continuously push up costs — and therefore wouldn’t require the Fed to increase interest rates.

“But if you look at the rollout of the tariffs, it’s been anything but one time,” Gordon said, adding: “A few months from now, if we’re still looking at inflation that is looking hot, I hope people are not surprised as to why.”

It’s also not as if the market’s serenity about import taxes has particularly improved tariffs’ popularity with voters. More than two-thirds of voters polled in January blamed tariffs for increasing the prices they pay.

And Democrats continue to use it as a cudgel against the president in their efforts to win one or both chambers of Congress in the fall.

In other words, Trump has completely reset market expectations about how high tariffs can be — and proven that the economy can withstand them, at least alongside a powerful tech investment boom.

But he might pay a more painful price, with interest rate hikes and political losses in the midterm election.