Can the TACO Trade Push U.S. Stocks to New Record Highs?

The U.S. stock market's relentless climb toward new highs has become a game of “buy the dip, sell the news” — and President Trump's tariff theatrics are the perfect catalyst. Enter the TACO Trade, a Wall Street phenomenon where investors exploit the predictable market swings triggered by Trump's aggressive tariff threats and subsequent backpedaling. As the S&P 500 inches closer to its February 2025 record high, the question is: Can this volatile cycle sustain a breakout to all-time highs, or will the TACO-driven rally fizzle under the weight of policy uncertainty and valuation risks?

The TACO Trade: A Cyclical Opportunity

The TACO Trade (Trump Always Chickens Out) is simple yet lucrative. When Trump threatens steep tariffs — like the 145% duty on Chinese imports or the 50% levy on EU goods — markets panic, sending stocks plunging. But investors have learned to buy the dip, knowing Trump often softens his stance to avoid market backlash. The May 23 EU tariff threat, for instance, initially sent the S&P 500 down 1.3%, but when Trump delayed implementation until July 9, the index rebounded 2.1% in a single day. This pattern has turned tariff announcements into a predictable trading signal, with limit orders flooding in during dips to capitalize on rebounds.

The strategy's success hinges on foreign capital inflows and the resilience of tech giants. According to Bank of America, foreign investors poured $1.38 trillion annually into U.S. equities in 2025, a record pace fueled by expectations of tariff rollbacks and AI-driven growth. This influx has propped up the Magnificent 7 — Amazon, Microsoft, NVIDIA, Meta, Alphabet, Apple, and Tesla — whose dominance now accounts for 40% of the S&P 500's gains this year.

The Case for a Breakout: Valuations and Tech Leadership

The Magnificent 7 are the linchpin of this rally, and their valuations suggest there's more room to run. Take NVIDIA (NVDA), which analysts peg as the most undervalued of the group. Despite a 45% upside potential from current levels (based on a $166 price target), its forward P/E ratio of 24.6x is lower than the sector average. NVIDIA's AI chip dominance and redesigns to comply with U.S.-China trade rules are unlocking new growth avenues, even as geopolitical risks linger.

Meanwhile, Microsoft (MSFT) and Alphabet (GOOGL) are leveraging AI investments to drive cloud and advertising revenue. Microsoft's Azure cloud growth and Alphabet's Gemini AI models have analysts forecasting 16-21% upside for both stocks. Even Amazon (AMZN), despite a rocky start to 2025, is primed for recovery: its Q1 earnings beat and 8.7% revenue growth have analysts betting on a 28.6% rebound from current prices.

Risks in the Rearview: Trade Volatility and Valuation Bubbles

Yet the TACO Trade's sustainability is far from certain. The legal battle over Trump's tariff authority poses the biggest threat. A U.S. Court of International Trade ruling in April 2025 stripped Trump of unilateral tariff powers, though his appeal has created temporary ambiguity. If higher courts uphold the decision, the TACO cycle could end abruptly, leaving markets without their “buy-the-dip” crutch.

Then there's the valuation reckoning. While NVIDIA and Microsoft offer value, stocks like Tesla (TSLA) and Apple (AAPL) are overextended. Tesla's 30% year-to-date decline and management turmoil have left it trading at a 61.9% upside target, but execution risks remain high. Apple's 20% drop stems from China sales slumps and tariff costs, yet its 15% upside potential is overshadowed by geopolitical headwinds.

The Bottom Line: Play the Cycle, but Hedge the Risks

The TACO Trade's “buy-the-dip” playbook has worked for months, and it could push the S&P 500 to new highs if foreign capital flows and tech earnings hold up. NVIDIA and Microsoft are the clearest winners here, offering high upside with AI-driven growth and reasonable valuations.

But investors must prepare for turbulence. If trade talks stall, tariffs resurface, or courts curb Trump's authority, the cycle could break — and the Magnificent 7's high P/E ratios (Amazon trades at 30x earnings) leave little margin for error. Pair TACO bets with short-term Treasury exposure or tech ETFs to hedge volatility.

The TACO Trade isn't just a game — it's a high-stakes gamble on whether Trump's tariff brinkmanship and foreign investors' appetite can override the market's fear of policy chaos. For now, the odds favor the bulls, but the exit strategy should be as sharp as the entry.

Invest with conviction, but always keep an eye on the horizon.