US Stocks: “TACO Transactions” Face Changing Environment

■ "TACO trading" remains popular, and the S&P 500 hits a new record high.  

■ From a fiscal deficit perspective, the role of tariff revenue has grown, potentially altering "TACO trading." 
 
    Amid concerns that rising US tariffs could worsen domestic inflation and harm trading partners' economies, the US stock market showed a clear risk-averse reaction before April. Since then, market participants have become cautious about the negative impacts on the economy and corporate performance. As tariff policies continue to change, people have started to see through the US government's negotiating strategy, leading to the phrase "Trump Always Chickens Out." Consequently, the market perceives little risk in the US’s tough stance, and "TACO trading" has helped push stock prices higher. Even if higher tariffs cause short-term market risk aversion, such effects are temporary, and the S&P 500 still reaches new highs. 
 
    President Trump has historically used tariff increases as a bargaining tool for better trade terms. However, with the fiscal environment shifting in July, the future of "TACO trading" warrants caution. The US passed the Tax Cuts and Jobs Act on July 4. According to the Congressional Budget Office (CBO), the bill will increase the fiscal deficit by $3.4 trillion over the next decade—far more than the $2.4 trillion estimated in the version passed by the House in May. Meanwhile, the CBO expects tariff revenue to reduce the deficit by $2.8 trillion over the same period, somewhat curbing deficit growth. As the deficit exceeds expectations, tariff revenue's significance for the US government increases, potentially prompting a tougher negotiation stance, which could heighten concerns about fiscal deterioration. This could, in turn, push US bond yields higher, presenting a risk the government is cautious about. Therefore, the continuation of "TACO trading" should not be overly optimistic. 
 
    Based on the past 10 years of monthly average changes in the S&P 500 before 2024, July’s gain of 3.09% ranks second to November’s 3.81%, reflecting the typical "Summer Rally." This year, "TACO trade" appears to have contributed to the seasonal rise. Meanwhile, the weak August (up 0.25%) and September (down 2.31%) performances align with the "summer weakness" pattern. If US trade negotiations in August shift, "TACO trade" could lose momentum, and further stock price declines might occur amid the "summer dryness" market, warranting close observation.