Wall Street is betting Trump backs down on Iran — but what if the ‘TACO’ trade fails this time?

For six months, markets operated on a repeating pattern: when tensions with Iran escalated, equities dipped, and investors bought that dip on the assumption that threats would ultimately de-escalate. That assumption became known as the "TACO" trade — Trump Always Chickens Out. In September, that pattern stopped working, according to the source.

The shift matters because it tests whether markets have been pricing geopolitical risk correctly or simply extrapolating from a consistent prior. If investors have been treating escalation as noise rather than a genuine variable, a change in that behavior could affect how quickly — and how reliably — dips get bought during future flare-ups.

What to watch: whether September's break in the pattern proves temporary or marks a repricing of how markets interpret geopolitical threats. Also relevant is whether volatility around Iran-related headlines begins behaving differently from the prior six months. For now, the takeaway is that a widely followed heuristic has shown it can fail — a reminder that market patterns built on repeated outcomes are not guarantees.