“Trump always chickens out”: Investors’ taco bet drives stock prices higher – despite wars and tariffs

In the 1986 song "Land of Confusion," the British rock group Genesis addressed the aggressive political climate of the Cold War and the fear of nuclear war. "Many of my younger colleagues hardly know who Phil Collins is anymore," jokes Guy Miller, chief market strategist and economist at the insurance company Zurich. But the song by the famous singer and drummer's band remains frighteningly relevant almost 40 years after its release—which led Miller to name his new half-year stock market outlook after it.

"Even in today's political landscape, the confusion is palpable," Miller explains. US President Donald Trump, with his decrees and erratic policies, is creating uncertainty on the world stage. Furthermore, the US is turning away from free trade. As if that weren't enough, under Trump it has often become unclear who is the US's friend and who is the US's foe. Added to this are the wars in the Middle East and Ukraine. He also argues that it's unusual that Germany has suddenly launched an economic stimulus package worth hundreds of billions in this new situation.

The many twists and turns could leave investors perplexed. After all, they say the stock market hates nothing more than uncertainty. But although uncertainty was palpable in the first half of the year, the leading stock exchanges have seen massive gains since the beginning of the year – at least in recent weeks and in their own currency.

Since the beginning of the year, the American benchmark index, the S&P 500, has gained 6.4 percent. The European Euro Stoxx 50 has recorded a gain of around 10 percent over the same period, while the German DAX has even reached record highs, gaining 21.8 percent. The gain of the Swiss blue chip barometer, the Swiss Market Index (SMI), was more modest at 2.9 percent.

How do uncertainty and rising stock prices fit together? Investment experts cite several reasons for this.

The belief in tacos – "Trump always chickens out": Stock market experts, rarely at a loss for memorable abbreviations, have agreed on a new favorite catchphrase intended to bring order to the complex political situation in US politics and encourage them to buy stocks: Taco, short for "Trump always chickens out" – or in German: "Trump always chickens out." In short, this is based on the hope that Trump's tariff announcements will ultimately be "less hot than hot." Whenever his policies cause turbulence on the stock markets, he always backs down, so the assumption goes.

This is exactly what happened in the spring, when Trump, on his self-proclaimed "Liberation Day" on April 2, initially imposed monstrous tariffs on all major trading partners, but then temporarily suspended them a few days later. Prior to this, the situation on the bond markets had become increasingly tense, and yields on US Treasuries had risen significantly.

At that point, some stock indices had lost around 20 percent, which is generally defined on the stock market as the threshold of a bear market. Then the situation changed, and the stock markets began a significant and rapid recovery. "The belief in Taco was the main reason for this," says Thomas Rühl, Head of Investments at Schwyzer Kantonalbank.

However, it should be noted that European and Swiss investors' gains on US equities are being reduced by the weak dollar. Investment products based on the S&P 500 or the MSCI All Country World Index (ACWI) – in which the US has a significant weighting – are likely to result in losses unless they have hedged the dollar-franc currency risk.

No recession expected for the US economy: "Moreover, there are currently few signs in the economic indicators that point to an economic downturn in the US," says Rühl. In April of this year, economists and investors briefly assumed that Trump would pursue his protectionist trade policy without compromise and lead the US economy and even the global economy into a recession. However, Trump subsequently demonstrated that he reacts to market signals and will backtrack if necessary.

Supportive fiscal stimulus: "Investors' hopes have also grown that the European economy will emerge from stagnation thanks to the significantly more expansive fiscal policy," says Rühl. Many were surprised by the development and are now hoping for rising stock prices, which will benefit from the planned multi-billion dollar investments in the defense and infrastructure sectors. Hopes for a more united Europe have also grown.

The strong performance of the European stock markets, however, can be explained primarily by the shifting of large investors from American to European stocks, says Matthias Geissbühler, Head of Investments at Raiffeisen Switzerland.

The tax cuts proposed in the new US budget law, the "Big Beautiful Bill," are also likely to provide fiscal stimulus in the US, according to Thomas Heller, Chief Investment Officer at Frankfurter Bankgesellschaft. The downside, however, is the rising budget deficit and the ever-increasing national debt. "The question is when deficits and debt will become more of a focus for the financial markets," he says. Currently, this is not the case; the markets are "surprisingly relaxed."

Strong demand for stocks from US private investors: Market observers cite strong demand from US private investors as another factor driving rising US stock prices. Geissbühler says they have taken advantage of stock market corrections in recent months to buy more stocks. This phenomenon is known in stock market jargon as "buying the dip."

Wars barely affect corporate profits: The enormous geopolitical uncertainties remain—namely the conflict in the Middle East and the war in Ukraine—and have not prevented the rise in stock prices. Why was this so? In the wake of the Israel-Iran war, uncertainties did temporarily increase in June, says Heller. However, such conflicts only have an impact on the global economy if raw materials—especially oil—become significantly more expensive. This is not currently the case.

The risks in the Middle East are already reflected in stock prices, says Rühl. Furthermore, there has at least been no further escalation. However, the risk remains that the conflict could escalate in another way, for example through cyber or terrorist attacks. Ultimately, however, neither the conflict in the Middle East nor the war in Ukraine have a significant negative impact on corporate profits, says Miller.

The Zurich representative expects stock prices to continue rising in the second half of the year, albeit against a backdrop of market volatility. Investors have seen how important it is for the US government to avoid a recession and a stock market bear market. If the risks of this increase, it can be assumed that the government will adjust its policies again. This also speaks in favor of the US stock market, relatively speaking. The US still has the largest and most liquid financial market in the world, and the weak dollar could provide a tailwind for US companies' earnings.

However, there is a risk that US economic growth could slow significantly. This could be triggered if investors' taco hopes do not materialize and Trump's tariffs turn out to be even higher than feared. Ultimately, the tariffs act like a tax that US households would have to pay – in the form of higher prices. This could drive up inflation and weaken the economy.

Heller, however, believes the fundamental environment for equities remains intact. However, geopolitical risks, especially the trade conflict, remain latent risk factors.

Meanwhile, Rühl expects a sideways movement in stock prices in the coming months. Among other things, a weakening of the US economy is to be expected. The Swiss stock market's performance is also overshadowed by the threat of US tariffs on pharmaceutical imports – even though Trump's threats to impose tariffs of over 200 percent are likely to be considered implausible.