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After a period of relative calm on the trade front, markets are once again grappling with heightened uncertainty. The temporary “pause” on U.S. tariffs against key BRICS-aligned nations officially expired last week, sending ripples of anxiety through global equity and currency markets. Yet, in a surprising counterpoint, Goldman Sachs upgraded its outlook for the S&P 500, citing resilient corporate earnings, stronger-than-expected economic data, and robust U.S. consumer demand.

This mixed message has left investors wondering: is this the time to lean into risk and embrace cyclical exposure — reviving what market pundits have dubbed the “Taco Trade” — or is this a dangerous trap disguised as an opportunity?

Below, we examine the evolving tariff backdrop, Goldman’s bullish case, the implications for volatility and cyclical stocks, and whether sentiment supports a sustainable rally or merely a tactical bounce.

Tariff Freeze Melts Away As GS Upgrades S&P

For nearly nine months, investors had enjoyed a fragile truce in global trade policy. The Biden administration’s deal with BRICS-aligned economies — freezing planned tariff hikes in exchange for certain concessions — provided breathing room for corporate supply chains and allowed equity markets to rally to record highs earlier this year.

That respite ended abruptly when U.S. officials announced on July 1 that the tariff pause would expire without a replacement framework. New levies, averaging 10% on imports from BRICS+ nations, are now in force, reigniting fears of retaliatory measures and higher input costs for manufacturers.

Markets initially reacted as expected. Emerging market currencies sold off, U.S. futures wobbled, and the CBOE Volatility Index (VIX) jumped from a June low of 13 to over 20 in a matter of days. Industries with significant global exposure — including semiconductors, industrials, and autos — were particularly hard hit.

Yet in an unexpected twist, Goldman Sachs issued a mid-year upgrade to its S&P 500 target, lifting its year-end forecast from 5200 to 5500. Strategists argued that the U.S. economy remains “remarkably resilient,” with strong labor market data, easing inflationary pressures, and robust corporate earnings. The upgrade was interpreted by many as a signal that the tariff drama may not derail the broader bull market after all.

Trade Tensions Spark VIX Surge – TACO?

The VIX’s sharp ascent reflects growing unease about policy-driven risk. Historically, volatility spikes tied to trade policy tend to be short-lived but can be painful for portfolios positioned too optimistically. The current environment is eerily reminiscent of 2018–2019, when the U.S.-China trade war sparked repeated bouts of risk aversion, only to be followed by equity recoveries when tensions eased.

For some investors, the tariff-induced VIX surge is a buying opportunity — particularly for cyclical stocks poised to benefit if the U.S. economy continues to expand. This has led to renewed discussion of the so-called TACO trade — an acronym for Transports, Autos, Casinos, and Oil — a basket of economically sensitive sectors that tend to outperform when growth and consumer demand remain strong despite headline risks.

Early signs are mixed. Airline and cruise operators have seen modest rebounds from their recent lows, while oil prices have stabilized near $85 per barrel, reflecting healthy demand and constrained supply. Casinos, especially those with heavy Macau exposure, remain under pressure from geopolitical and currency headwinds.

Still, for tactical traders, the notion of buying into cyclical sectors during a bout of tariff-related panic has some appeal — provided one has the risk tolerance and patience to weather continued volatility.

Taco Trade Heating Up Again?

The TACO trade earned its nickname during the post-pandemic reopening phase, when investors piled into transports, autos, casinos, and oil on the thesis that pent-up demand and fiscal stimulus would drive outsized earnings growth. Those sectors posted spectacular gains in 2021, only to underperform in 2022–2023 as inflation surged and rate hikes cooled demand.

Now, with inflation moderating and GDP growth exceeding expectations, some on Wall Street see room for cyclical leadership to reemerge — even in the face of renewed tariffs.

Goldman’s research suggests that the tariff impact, while negative for specific sectors, may be “manageable” for the broader economy. Consumer balance sheets remain strong, and corporate America has had time to adjust supply chains. Furthermore, many TACO sectors are now trading at attractive valuations relative to historical averages, with forward P/E ratios at multi-year lows despite healthy fundamentals.

Yet there are reasons for caution. The market is still digesting the end of the tariff pause, and retaliatory measures from BRICS nations could escalate. Moreover, the elevated VIX suggests that investors remain skittish, and sustained multiple expansion may be hard to achieve until clarity emerges on the trade front.

Market Sentiment: Resilient, But Fragile

A key question is whether sentiment supports a sustainable rally. On one hand, institutional flows into equities remain positive, with the latest EPFR data showing $11 billion in inflows to U.S. stock funds last week. Credit markets remain calm, and the yield curve has steepened modestly, a sign that recession fears are easing.

On the other hand, the AAII investor sentiment survey still shows a cautious tone, with bullish sentiment at just 38%, below the long-term average. Hedge fund positioning remains light, and volatility markets reflect elevated hedging activity.

Technical indicators also point to a market at a crossroads. The S&P 500 remains above its 50-day and 200-day moving averages, but breadth has weakened. Fewer than 60% of index constituents are trading above their 50-day averages, down from 75% in May. This divergence suggests that while headline indices remain strong, leadership is narrowing — a classic sign of late-cycle dynamics.

Put simply, investors are cautiously optimistic — but fragile. Any further escalation in tariffs or signs of slowing growth could quickly erode confidence.

Are Investors Facing an Opportunity or a Trap?

Against this backdrop, the question remains: is this an opportunity to buy into cyclical sectors at attractive valuations, or a trap laid by unresolved trade tensions and fragile sentiment?

Bulls argue that the market has already priced in much of the tariff risk, and that the underlying fundamentals — strong consumer demand, moderating inflation, robust earnings — support higher equity prices. Goldman’s upgrade reflects this view, suggesting that headline risks are outweighed by the resilience of the U.S. economy.

Bears counter that the S&P 500 is already trading at a forward P/E of over 21, leaving little margin for error if trade tensions escalate or if retaliatory tariffs hit corporate profits harder than expected. The elevated VIX and weak market breadth hint at an underlying fragility that could quickly unravel if conditions worsen.

For individual investors, the choice depends on risk tolerance and time horizon. Those with a long-term perspective and appetite for volatility may find select opportunities in undervalued cyclical sectors. But shorter-term traders should remain cautious, as headline-driven swings are likely to continue.

Conclusion: Takeaways for Investors

The expiration of the tariff pause and Goldman’s bullish upgrade have set up a fascinating — and challenging — environment for investors. On one hand, trade tensions and elevated volatility are clear risks that could weigh on sentiment and earnings. On the other, the resilience of the U.S. economy and attractive valuations in cyclical sectors suggest that opportunities exist for those willing to look past the noise.

Here are the key takeaways:

1. Tariffs are back, but not catastrophic — yet. The expiration of the pause has increased uncertainty, but the immediate economic impact may be muted compared to initial fears.

2. The VIX spike is a warning, not a disaster. Elevated volatility reflects justified caution, but also creates tactical opportunities for disciplined investors.

3. The TACO trade is intriguing — but selective. Transports, autos, casinos, and oil offer value, but investors should focus on companies with strong balance sheets and pricing power.

4. Sentiment is fragile. Market leadership is narrowing, and investors remain cautious. Be wary of chasing rallies without appropriate risk management.

5. Stay diversified and nimble. Maintain a core allocation to defensive sectors and quality stocks, while selectively adding cyclical exposure where valuations justify the risk.

As the tariff time bomb continues to tick, the coming months will test investor discipline and risk appetite. For some, the TACO trade may indeed be “back on the menu” — but only for those with the stomach to handle the heat.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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