2025.07.14 Weekly

TACO is done

Trump extended the deadline once again, but I don't think this is the time to stay on the TACO trade. It was a fun while it lasted but let’s briefly review the key aspects of why it worked, and why it probably won’t this time as we review recent developments and the risks ahead.

Trump clearly likes to use the stock market as his main KPI as well as economic data releases as it suits him. This created a belief that he would do whatever it takes to save the stock market and would thus ‘chicken-out’ soon after his antics caused an adverse reaction in the market. But what was even more crucial to why the TACO trade worked was the extreme and ultra-concentrated positioning. After a strong 2-year bull run driven by ‘US exceptionalism’, global fund managers and institutions were extremely overweight US equities and long Dollars by the end of 2024. And because revenue and earnings growth was slowing in almost every sector except IT last year, that OW-positioning became particularly concentrated in the US Tech sector on continually strong profitability and AI-capex. But that crowding was already a major concern in Q4 of 2024 and not only was it hotly discussed, but I distinctly remember a good number of sell-side notes recommending a rotation into European equities which turned out to be a rather prescient call - Europe’s Stoxx50 is up 10% ytd whereas the equal-weighted mag7 is up only 2% in that same period.

Putting that into context with the above chart (Stoxx50/S&P500 ratio in White, XLK/SPX ratio in Green), I’d say the TACO trade most probably wouldn’t have worked as seamlessly without the bouts of capitulation in US Tech and the broader US market after April 1st. Given where markets are now and the narratives that got us here – the main narrative in addition to TACO has been ‘inflation is coming down and the Fed will start cutting again soon.’ This makes for a completely different setup compared to what made the TACO trade work. I’d go so far as to say that TACO is now a thing of the past…