Has TACO trade in stocks run its course? Chris Wood of Jefferies decodes

TACO (Trump Always Chickens Out) trade may have run its course as a positive factor for the markets, suggests Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

The US stock market, Wood said, continues to celebrate the AI (artificial intelligence) capex trade while ignoring the tariff-related noise based on the TACO viewpoint, or what is otherwise known as the Trump put.  

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“But GREED & fear has started to wonder if TACO has run its course as a positive factor for markets. The 47th president is exhibiting growing self-confidence that the rallying stock market is sending the signal that his tariff agenda will not damage the US economy or indeed the global economy. Or in other words that he should feel free again to indulge in his tariff obsession. It is probably going to take a market correction to force Trump to back off again, just as was the case post-Liberation Day,” Wood wrote.

From a market standpoint, Wood believes, it is just a matter of time before the negative impact of tariffs starts to show up in the macro-economic data as existing inventories are depleted. 

“Indeed this has begun to happen with this week’s CPI data. In addition to hard numbers, there is also the increase in uncertainty among businesses which is the natural consequence of the ongoing negotiations regarding tariffs,” he said.

The risk, Wood believes, is that the market’s renewed confidence in the AI capex trade could cause Trump to overplay his hand as regards tariffs.  

“This could already have happened. Tariffs amount to a regressive tax hike, though this will take longer to hit the overall American economy given the extent to which consumption has recently been driven by aging Baby Boomers who are now earning a positive real return on their money market funds,” Wood said.

Corporate earnings key 

Even as valuations concerns (Nifty 50 PE of 24.3x one-year forward earnings) are back to the fore after the sharp rally from April 2025 lows that has seen the Nifty 50 rise around 13 per cent to around 25,100 levels, going ahead corporate earnings, analysts said, especially for the mid-and small-cap segment, hold key for the overall market stability.

Mid- and small-cap indices have performed well over the past year, but the June 2025 quarter (Q1-FY26) results will offer better clarity, feels Jignesh Desai, chief executive officer for institutional equities at Centrum Broking.

Key concerns for Indian markets

These segments, he said, traditionally command a premium due to their higher growth potential—but that premium must now be validated by actual performance.

“In areas like auto ancillaries, chemicals, and specialty industrials, rising input costs may exert pressure on margins. However, we see attractive opportunities in defence-related mid-caps, urban real estate, PSUs, and NBFCs. If earnings meet expectations, these segments could drive the next leg of the broader market rally,” Desai said. 

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Valuations in the BFSI space, according to Rahul Arora, chief executive officer for institutional equities at Nirmal Bang, are relatively attractive despite near-term pressure on earnings from slowing credit growth, NIM compression and stress in some pockets. 

From an 18 month perspective, he believes, the sector looks attractive as credit growth will eventually pick up with lagged impact of rate cuts and liquidity infusion while the worst of NIM compression will also be behind.

“The consumer durables space has also seen some correction with a wash out summer season, but revival is likely if the festive season pans out well along with expected front loading of demand due to change in BIS norms. The auto sector may also receive a festive boost along with regulatory changes such as the introduction of ABS norms of two wheelers, which may support demand towards the end of 2025,” Arora said.