Enter The TACO Trade
By Crest Capital Advisors on June 2, 2025
Dow: 1.60% to 42,270.07
S&P 500: 1.88% to 5,911.69
Nasdaq: 2.01% to 19,113.77
Russell 2000: 1.30% to 2,066.29
Bitcoin: 105,045
10 Year Yield: 4.40%
Outperformers: Real Estate 2.73%, Technology 2.36%, Communication Services 2.11%
Underperformers: Energy (0.56%)
US equities were higher for the week, gaining back some of the prior week’s losses as President Trump reversed course on his threatened tariff increases to the Eurozone (more on this topic below). Big tech was broadly higher and led the overall market.
The big news mid-week, however, came from the US federal court where a panel of judges struck down the Trump administration’s tariffs, including the 10% baseline tariff, the 20% incremental tariff on China, and the 25% tariff on non-USMCA-compliant imports from Mexico and Canada. (More on this topic below as well!) However, a US federal appeals court subsequently allowed the tariffs to remain while the case is argued in the coming weeks.
Elsewhere on trade, Treasury Secretary Bessent said talks between US and China are “a bit stalled,” and may need to be revived through a call between Trump and China’s Xi. Notably, on Friday morning, Trump accused China on Truth Social of violating the agreement they had with the US to ease tariffs. Overall, it would appear a US-China trade deal remains elusive.
Beyond trade, Nvidia earnings were a major event this week. Results and guidance came in better than expected, despite billions in lost sales from the China chip embargo. Management emphasized strong structural AI demand offsetting China-related headwinds, fueled by rapid growth in reasoning AI, AI infrastructure build-outs, sovereign projects, and enterprise adoption. Moving to this week’s economic calendar, the main event was the release of the April Core PCE which came in below expectations, rising just 0.1% month-over-month. The headline rate is all the way down to just 2.1%, whereas the Core (Ex-Food/Energy) is down two-tenths to 2.5%! These are by far the lowest levels since the days of ‘transitory’ inflation in 2021. Despite this progress on the inflation front, the Fed continues to behave like a deer in the headlights, unwilling to act on rates for fear of the possibility of a future inflationary rise due to Trump’s policies. Muddying the waters even more has been Trump’s badgering of the Federal Reserve to cut interest rates, a theme that was no doubt touched upon when Fed Chair Powell and President Trump met in the Oval Office this week. All of this acts as inspiration for our meme of the week. Enjoy!
Let’s TACO-bout it
Forget FAANG and the Mag 7. This week, it’s all about the TACO trade. The acronym stands for “Trump Always Chickens Out,” and references a pattern in which President Trump announces sweeping tariffs on other countries and then walks them back following a market selloff (which then prompts a rally).
The term was first coined by a Financial Times columnist and has since gained traction on Wall Street.
The TACO trade has been in full swing in the past five days, beginning on Friday, when Trump called for 50% tariffs on goods from the European Union starting June 1. The announcement caused markets to sink, but they rallied on Tuesday after Trump announced over the weekend that the EU tariffs were delayed until July 9th.
To be sure, Trump isn’t a TACO fan. He defended his tariff actions when asked about the acronym on Wednesday. “It’s called negotiation. Don’t ever say what you said. That’s a nasty question,” he told a reporter. LOL
Plan B on Deck
A US federal court ruled unanimously on Wednesday to strike down most of Donald Trump’s new tariffs. The court ruled that the International Emergency Economic Powers Act “does not authorize the President to impose unbounded tariffs”. Subject to appeal, this nullifies all the tariffs imposed by the administration under that authority. These include all the “reciprocal” tariffs announced on April 2nd (including the 10% baseline that was still in effect until Wednesday), as well as the 25% tariffs on Canada and Mexico and 20% duties on China related to border crossings and fentanyl traffic.
Is this the end of the trade war? Is the US system of “checks and balances” providing the sort of rule of law we were promised in elementary school? Or is this ruling nothing more than a nuisance and a delay for the administration, which remains determined to impose tariffs and force trade deals? Unfortunately for investors hoping for trade peace, this ruling will most likely only slow Trump down. At the margin, this will be positive for US markets. But the tariff war is far from over.
First, the good news. There are reasons to think this ruling from the US Court of International Trade may survive administrative appeals. This court was not expected to be hostile toward the administration. The three-judge panel that ruled unanimously on the decision included judges appointed by Barack Obama, Ronald Reagan, and Trump himself. In fact, Trump’s Department of Justice was pushing for this and other trade cases to be heard by this court, thinking it would be sympathetic to the administration’s cause.
This view proved mistaken. While the courts have a history of deferring to the president on matters of national security, the trade court clearly thought Trump overstepped the law and at least some observers think its ruling may survive a review by the Supreme Court.
The problem is that while the IEEPA may not give Trump the authority to impose sweeping tariffs, other statutes do. In its ruling, the court explained that the IEEPA of 1977 was designed to limit the president’s authority to impose tariffs. IEEPA was passed to supersede the Trading With the Enemy Act of 1917, which Richard Nixon had previously used to impose universal tariffs.
However, in its ruling, the court specifically named two other statutes—section 122 and section 301 of the Trade Act of 1974—that could be used to impose tariffs, on the grounds of “large and serious balance-of-payments deficits” (section 122) or “unfair trade practices” (section 301). In other words, the court didn’t say Trump can’t impose tariffs. It just said he needs to impose them under different legal authorities.
Section 301 tariffs are directed at countries guilty of unfair trade practices and so first require an investigation by the US Trade Representative. This can be a slow process, and a public comment period is required, which can make it even slower. However, China has already been subjected to a 301 investigation, so 301 tariffs could be imposed on China relatively quickly. Once the initial procedures complete, section 301 tariffs can be set high and last for a long time—some are still in place from Trump’s first term.
Section 122 tariffs are intended to address trade imbalances and do not require an investigation. But they come with limits. They max out at 15% and expire after 150 days without approval and extension by Congress.
How might Trump utilize these statutes? If his appeal against the ruling on IEEPA tariffs fails, he could propose that his new 10% universal, or “baseline,” tariff be reapplied as a section 122 tariff. He could then ask Congress to extend it beyond the 150-day period. Congress might even be persuaded to write these baseline tariffs into the budget currently being negotiated in the Senate. That would have the added benefit of helping to constrain the US fiscal deficit, even if it doesn’t fully offset domestic tax cuts.
While the universal 10% tariff helps with raising government revenue, it is not much of a negotiation tool. However, Trump can still threaten countries with Section 301 investigations and resulting tariffs if they do not line up to make deals with the US.
The bottom line is that this ruling is a marginal positive. It could at least succeed in slowing the imposition of punitively high tariff rates, which would give investors and businesses more time to adjust. And it is encouraging to see the rule of law being upheld by the courts. The problem is that over the years, Congress has written laws that give the president many ways to impose tariffs. The trade war, and the policy uncertainty surrounding it, is not over.
“Always Too Late”
We’re old enough to remember when all Jay Powell could talk about was “supercore” inflation. That’s Core PCE services ex-housing, an index that the Bureau of Economic Analysis doesn’t even release publicly. But a number of research firms we follow calculate it for us, and we wonder if Powell will ever mention that it’s fallen to 2.96% year-on-year, a new low for the disinflation cycle? And for April, reported this week, “supercore” was in downright deflation. So, where’s all that tariff-driven inflation? Where’s all the expectations-driven inflation? We’re still waiting…as is the Fed…thusly earning the “always too late Powell” moniker the President has hung on him.
At this point, we have to ask rhetorically, will he wait until we actually hit the target before they cut again? There’s always an inflation boogeyman around the corner when it comes to this Fed. All the critics’ comparisons to the Arthur Burns’ Fed (the Fed that let inflation get out of control in the 1970s) sure did some serious damage to the psyche of this Fed back in 2022—2023 that they can’t seem to overcome.
Or we could rationalize it as follows: The Federal Reserve operates within the constraints of economic uncertainty, relying on lagging indicators to guide policy decisions. As a result, it often finds itself reacting to conditions that have already shifted rather than proactively shaping them. Historically, the Fed has been slow to tighten when inflation starts brewing, only to overcorrect when signs of economic slowdown emerge. Similarly, rate cuts frequently come after the economy has already weakened, reflecting a cautious approach that errs on the side of waiting for overwhelming evidence before making decisive moves. This tendency to lag behind economic realities can exacerbate boom-and-bust cycles, reinforcing the perception that monetary policy is perpetually one step behind.
Going back to the data for a moment, here is what we received on Friday. Definitely good news for those looking to see inflation continue its downward trend.
April PCE Price Index +2.1% year-over-year vs. +2.2% estimated and +2.3% prior.
April Core PCE (Ex-Food/Energy) +2.5% year-over-year vs. +2.5% estimated and +2.7% prior.
Or just take a look at the graph below. The picture tells the story, and you’ll note the trend is once again pointing down and to the right after a brief sideways pause a few months ago.
Lack of Flow
Believe it or not, free cash flow (FCF) growth has been negative for the largest tech companies as the AI race has accelerated. The circular capex narrative around the Mag 7 has been a central theme in markets for months now. While the durability of this trend came under scrutiny at the start of earnings season, the largest companies have shown little indication of scaling back investment thus far.
However, a notable shift has occurred in free cash flow growth. For the Mag 7, excluding Nvidia, FCF growth peaked at 52% year-over-year in Q1 2024, but has since declined to -11% as of Q1 2025. Although newly announced international investments may help extend the AI capex cycle in the near term, the numbers being floated are increasingly extreme and may not fully materialize.
The biggest tech companies are going to need to start posting a return on investment, and soon, before the market once again intervenes and punishes the extra spending as it did in 2022.
Q1 Earnings Season Update
The narrative for earnings this quarter is clearly that tariff fears are not showing up in Q1 earnings results. With earnings season nearly complete, EPS growth for Q1 settled at 14% for the overall index, alongside 5% revenue growth. Nvidia reported this week and that is not yet in these table results (So we expect this will actually move even higher next week). Bottom line, Q1 was a solid quarter. Attention is now turning to the second quarter, where the impact of tariffs is expected to play a more significant role.
Economic Funnies
We imagine this cartoon as Jerome Powell’s watch…suggesting we are somewhere between “Still Time” and “Too Late”.
Crazy Stat(s) of the Week
- The US sovereign CDS (credit default swaps – a measure of risk for the underlying credit) spread is currently trading at levels similar to countries that are rated BBB+, such as Italy and Greece! See the chart below.
- According to Redfin, there are 500k more sellers than buyers in the residential real estate market. Persistently high mortgage rates are taking a toll and keeping demand for housing extremely low.
- The Health Care sector’s weighting in the S&P has fallen off a cliff, going from nearly 16% down to below 10% in just a few years.
Quote of the Week
“The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.”
– Jerome Powell, July 15th, 2024, in reference to ‘long and variable lags’ between policy action and policy impact.
Calendar of Events to Watch for the Week of June 2nd
The tail end of earnings season will not be without some notable names reporting in consumer, cybersecurity, and semiconductors next week. In other corporate updates, there will be several investor conferences including the American Society of Clinical Oncology Meeting where we typically get a large dose of drug trials/data from various companies in the field.
Turning to monetary policy, despite the large volume of Fedspeak on tap this week, the narrative around the Fed is little changed as officials continue to push the patience stance. The market continues to price in around 50 basis points of cuts through year-end. Turning to the economy, we get US economic data readings on US Manufacturing and Services sectors, as well as Job Openings and Factory Orders. But by far the biggest event of the week will be Friday’s Nonfarm Payrolls report.
Monday 6/2 – The Markit Manufacturing (Final) PMI for May is expected to come in at 49.2 v. 52.3 previously reported in the preliminary read. This movement from expansion to contraction (the 50 mark delineates one condition from the other) is reflective of ongoing economic uncertainty. The ISM Manufacturing report for May is expected to confirm the contraction at 49.5, though up a tick from the previous month’s reading of 48.7. Finally, April Construction Spending is expected to show a -0.2% contraction.
Tuesday 6/3 – The JOLTS Job Openings report for April is expected to remain roughly in-line with last month at 7.27m openings. April Factory Orders are expected to contract by -3.0% v. the prior month’s 3.4% increase.
Wednesday 6/4 – The ISM Services PMI for May is expected to remain in expansion at 52.1 v. 51.6 last month. The Fed’s Beige Book will be released today as well, but not much is expected here in terms of market moving comments. The ADP Private Sector Employment Survey is expected to show 125k net new jobs added, up from 62k last month.
Thursday 6/5 – Q1 Unit Labor Costs (final reading) are expected to remain in line with the prior reports at 5.7%. Q1 Productivity is also expected to be the same as previous at -0.8%. The Weekly Jobless Claims data will continue to get scrutiny every Thursday. Looking overseas, European CPI and PPI will be released with the former expected to decline below 2% to 1.7% and the latter expected to be in outright deflation at -1.7%.
Friday 6/6 – The main event of the week will be the Nonfarm Payrolls Report, where economists are projecting 125k net new jobs, down from 177k last month. (Notably, this would be one of the weaker employment reports in some time.) The unemployment rate is expected to remain unchanged at 4.2%, and Hourly Earnings are expected to increase by 0.3%. Probably the only thing that will light a fire under the Fed to start addressing interest rates again will be a significant weakening in the official labor data.
Source: MarketWatch / FactSet (May 2025)
