"TACO" trading excessive? Wall Street warns that the rebound has deviated from fundamentals

Independent research firm BCA and strategists at JPMorgan Chase have issued a rare unanimous warning: the current market rebound has detached from fundamental support.

Recently, as the S&P 500 index recovered all its losses from 2025 and turned positive, the concept of "TACO trading" has become increasingly popular. However, BCA's strategists warn that investors are becoming overly complacent, and the stock market has not fully reflected the potential risks.

BCA points out that while hard data has yet to show the signs of weakness already present in soft data, the economy began to slow down before Trump announced the so-called reciprocal tariff policy two months ago. JPMorgan Chase believes that the likelihood of rising inflation in the U.S. is high. It is expected that summer trading will be "similar to a stagflation phase," which is unfavorable for the sustained rebound of U.S. stocks, especially considering that the S&P 500 is trading at a forward price-to-earnings ratio of 22 times.

Wall Street Journal previously reported that the so-called "TACO trading" (Trump Always Chickens Out) stems from the market's adaptation to Trump's behavioral patterns—issuing ultimatums first, then offering concessions or compromises to avoid the worst-case scenario. Since the trade war began on April 2, traders have become accustomed to pricing in future trade agreements and expectations of easing the trade war. As of Wednesday's close, both the S&P and Nasdaq have recovered their year-to-date losses, but the Dow is still down 0.27%.

Volatility Indicators Signal Danger

The market's disregard for downside risks is concerning.

BCA cites relatively low sentiment indicators as evidence, including the Chicago Board Options Exchange Volatility Index (VIX) and the SKEW index, the latter measures which is more expensive between the implied volatility of put options or call options.

The low levels of these indicators suggest that investors have little willingness to purchase downside protection.

BCA warns that "economic surprises are losing momentum," and risk assets face vulnerability to reversal, recommending a defensive allocation.

Deteriorating Fundamentals Combined with Valuation Bubble

JPMorgan Chase's report believes that "the likelihood of rising inflation in the U.S. is high."

JPMorgan Chase equity strategist Mislav Matejka stated in a research report released on Monday:

Positions are no longer cautious, short covering is significant, systemic risk reallocation has occurred, volatility is normalizing, and investor sentiment has recovered... Future stock market trends should be driven more by fundamental outcomes rather than technical factors.

Matejka observed that the rise in bond yields is not only a result of inflation but also reflects concerns about fiscal sustainability. These adverse trends have become more complicated due to the weakening of the dollar index. The convergence of these factors "is unfavorable for a sustained rebound, especially considering that the S&P 500 is trading at a forward price-to-earnings ratio of 22 times."**

For Matejka, another alarm is that the weight of U.S. household stock holdings as a proportion of total assets has reached a historic high. Ordinary investors already hold a large amount of stocks, which may suppress their current inclination to continue buying.

Considering these factors, JPMorgan Chase expects summer trading to be "similar to a stagflation phase," and that "the next phase will show weakness."