The TACO Trade: Why U.S.-China Tariff Fears Are a Buy Opportunity

The U.S.-China trade war has been a years-long rollercoaster of tariffs, threats, and temporary truces. Yet beneath the geopolitical noise lies a compelling investment thesis: market overreactions to trade tensions have consistently created buying opportunities in sectors with strong fundamentals. Call it the “TACO” trade—short for “Trump Always Chickens Out”—where fears of escalation are met with eventual compromises, and equities rebound sharply. Today, with the Supreme Court poised to rule on the legality of emergency tariff powers, the stage is set for a repeat of this pattern. Here's why investors should lean contrarian into tech and industrials now.

The TACO Effect: When Geopolitical Drama Fuels Market Rebounds

History shows that markets habitually overreact to tariff threats but stabilize when cooler heads prevail. Take the Phase One Trade Deal of 2020, which saw the S&P 500 surge 12% in weeks as tariffs were paused. Or the May 2025 court ruling that struck down tariffs imposed under the International Emergency Economic Powers Act (IEEPA), triggering a 5% rally in industrials and tech. These are textbook examples of the TACO effect: markets price in worst-case scenarios, only to rebound when policymakers retreat from maximalist positions.

Why Tech and Industrials Are the Contrarian Plays

The current volatility has unfairly punished tech and industrials, two sectors with structural growth trajectories that far exceed the noise of trade squabbles.

1. Technology: The Global Supply Chain's Lasting Resilience

Tech giants like NVIDIA (NVDA) and ASML (ASML) have been hammered by fears of supply chain disruptions. Yet their dominance in AI, semiconductors, and advanced manufacturing is unshaken. Consider ASML's stock:

While tariffs on Chinese imports briefly crimped margins, these companies have already diversified supply chains and hedged against volatility. The sector's long-term demand drivers—AI, cloud computing, and 5G—remain intact. A resolution to trade tensions would act as a catalyst, unlocking pent-up demand for tech infrastructure.

2. Industrials: The Misunderstood Bargain

Industrial stocks like Caterpillar (CAT) and 3M (MMM) have been dragged down by fears of trade-driven inflation and slower global growth. Yet their fundamentals are robust:

These companies have pricing power to offset input costs and benefit from infrastructure spending in both the U.S. and China. A tariff rollback would directly reduce their costs and boost demand for capital goods.

The Supreme Court's Role in the TACO Play

The next key catalyst is the Supreme Court's ruling on the administration's use of IEEPA to justify tariffs. If the court follows the May 2025 federal court's lead, it could invalidate broad tariff authority, forcing policymakers to negotiate rather than threaten. Even a partial ruling against IEEPA would force a return to diplomacy—a scenario that historically has been bullish for equities.

The Contrarian Call: Buy Now, Reap Later

The market is pricing in a “worst-case” trade war scenario, but history shows that “worst-case” rarely materializes. With the Supreme Court decision looming, investors should:
1. Overweight tech and industrials with global exposure and strong balance sheets.
2. Focus on companies with hedged supply chains (e.g., Texas Instruments (TXN), Rockwell Automation (ROK)).
3. Avoid sector laggards reliant on China-specific demand without diversification (e.g., luxury goods or raw materials).

Final Note: The TACO Trade Isn't a Gamble—It's a Pattern

From 2018 to 2025, every major tariff threat has been met with a retreat or compromise. The May 2025 court ruling and the Phase One Deal are just the latest proof. By buying into tech and industrials now—while fears are at their peak—investors position themselves to profit when the market finally recognizes that geopolitical drama fades, but fundamentals endure.

The TACO effect is alive. The question is: Will you bet against it?