“TACO” Trade Overextension? Wall Street Warns Rally Is Detached from Fundamentals

Independent research firm BCA and strategists at JPMorgan have jointly issued a rare warning that the current market rebound has diverged from fundamental support.

Following the S&P 500’s recovery of all losses in 2025 and its shift to positive returns, the concept of the "TACO trade" has gained popularity. However, BCA strategists caution that investors are growing overly complacent, with the equity market insufficiently reflecting underlying risks.

BCA highlights that although hard economic data has yet to show the weakness visible in soft indicators, the economy had already begun slowing before former President Trump announced reciprocal tariff policies two months ago. Meanwhile, JPMorgan anticipates a significant risk of rising inflation in the U.S. It forecasts summer trading will resemble a “stagflationary phase,” which will challenge a sustained U.S. equity rally, particularly as the S&P 500 trades at a forward price-to-earnings ratio of 22.

As reported by Wallstreetcn, the "TACO trade" (Trump Always Chickens Out) describes the market’s adaptation to Trump’s behavior pattern of issuing ultimatums followed by concessions or compromises to avert worst-case scenarios. Since the tariff conflict began on April 2, traders have factored in expectations of future trade agreements and tariff easing. As of Wednesday’s market close, both the S&P 500 and Nasdaq regained their losses for the year, while the Dow Jones Industrial Average remained slightly down by 0.27%.

Market complacency towards downside risk is concerning.

BCA points to relatively low sentiment indicators such as the CBOE Volatility Index (VIX) and the SKEW index (SQEW), which measures the cost differential between implied volatilities of put and call options.

The persistently low levels of these metrics indicate investors have little appetite for downside protection.

BCA warns that “economic surprises are losing momentum,” leaving risk assets vulnerable to reversal, and recommends adopting defensive allocations.

JPMorgan’s report underscores a high likelihood of rising inflation in the U.S.

In a research note released Monday, JPMorgan equity strategist Mislav Matejka stated:

“Positioning is no longer cautious, short-covering has been substantial, systematic risk reallocation has occurred, volatility has normalized, and investor sentiment has rebounded… Future market direction should be primarily driven by fundamentals rather than technical factors.”

Matejka further noted that the rise in bond yields reflects both inflationary pressures and concerns over fiscal sustainability, with these negative trends exacerbated by a weakening U.S. dollar. The confluence of these factors “is unfavorable for a sustained rebound, especially given the S&P 500’s forward PE of 22.”

Another concern is that U.S. household equity holdings as a proportion of total assets have reached an all-time high, potentially limiting retail investors’ willingness to continue increasing exposure.

Considering these factors, JPMorgan projects that summer trading will “resemble a stagflationary phase,” followed by “a period of weakness.”