As markets adapted to the pattern of Trump delivering an ultimatum and then offering a climbdown or concession that avoids worst-case scenarios, the over 20% recovery in the S&P 500 index SPX has been dubbed the “Trump always chickens out” or “TACO trade.” After the tariff wars started on April 2, traders grew used to discounting future trade agreements and de-escalation.
Although the S&P 500 index has recovered all of its 2025 losses and is now slightly positive for the year, BCA strategists caution against investor complacency and a stock market that has not adequately priced in risks. They point out that the economy was already slowing down prior to Trump’s tariff announcement two months ago in the White House Rose Garden, even though hard data—official government economic statistics—had not yet shown the weakness evident in so-called soft data, which are qualitative surveys of sentiment or consumer intent.
As further proof that there is now little appetite for downside protection, BCA points to the comparatively low levels at which sentiment indicators like the Cboe Volatility Index VIX and SKEW SQEW, which measure whether the implied volatility on puts or calls is more expensive, are trading.
Mislav Matejka, an equity strategist at JPMorgan, made a similar observation in a research note released on Monday: “[F]uture equity moves should be more driven by fundamental outcomes rather than technicals. Positioning is not cautious anymore, short covering was significant and the systematic re-risking took place, on the normalization in volatility and the investor sentiment has recovered.”
The BCA issues a warning that risk assets are susceptible to a reversal and that “economic surprises [are] losing momentum”. It advises taking a defensive stance.
The note from JPMorgan makes a similar argument, stating that “the chances are that U.S. inflation moves up.”
Matejka noted that concerns about fiscal sustainability as well as inflation contribute to higher bond yields. A declining dollar DXY exacerbates these negative trends. He noted that the combination of these elements “is not conducive to a continued rally, especially in light of S&P 500 trading at 22 [times] forward” earnings.
The fact that the equity weight of American families as a percentage of total assets is at an all-time high is yet another cause for concern for Matejka. Because they already hold a large amount of shares, rank-and-file investors may be less inclined to purchase additional at this time.
