TACO prevails: Stocks jump after Trump calls off Greenland tariffs

• US stocks ripped higher late in Wednesday's session as Trump walked back his latest tariff threats.
• The president said he had reached a framework deal with NATO countries over Greenland.
• The president soothed markets earlier after he said he wouldn't use force to take over Greenland.

It looks like the TACO trade has won again.

US stocks surged late in Wednesday's session and closed with a strong gain after Donald Trump said in a Truth Social post that he had reached a "framework of a future deal" on Greenland following a meeting with NATO Secretary General Mark Rutte.

"This solution, if consummated, will be a great one for the United States of America, and all NATO Nations. Based upon this understanding, I will not be imposing the Tariffs that were scheduled to go into effect on February 1st," the president wrote.

Trump had threatened to hit eight European countries with a 10% tariff that would jump to 25% in June if no deal had been reached.

Details on the agreement were thin, but investors didn't hesitate to pile back into stocks, erasing much of Tuesday's steep loss.

Here's where US indexes stood at the 4 p.m. ET closing bell on Wednesday:

• S&P 500: 6,875.62, up 1.16%
• Dow Jones Industrial Average: 49,076.98, up 1.21% (+588.39 points)
• Nasdaq composite: 23,224.825, up 1.18%

The positive reaction is a clear example of the TACO trade in action, according to Art Hogan, the chief market strategist at B. Riley Wealth Management. He pointed out that Trump's comments on Wednesday appeared to address two of the biggest headwinds hanging over markets on Tuesday, when a sell-off wiped out around $1 trillion from the S&P 500.

"Walk softly and carry a big stick, and you get that TACO reaction and the market can finally unclench," he said. "It's an exhausting process and this is the exact news that investors were hoping to get some sort of resolution on."

The market had already been somewhat soothed earlier in the day when Trump said during his speech at the World Economic Forum in Davos, Switzerland, that he wouldn't use force to take control of Greenland.

Other trends in the "Sell America" trade also began to reverse, a sign that investors were gaining more confidence in US assets after a bruising session on Tuesday. The 10-year US Treasury yield dropped four basis points. The US Dollar Index also firmed slightly to 98.82.

"President Trump's statement that he won't use military force to control Greenland is sparking a relief rally on Wall Street on the heels of yesterday's sell-off," José Torres, a senior economist at Interaction Brokers, wrote in a note earlier in the day. "Like a swimmer awaiting the sound of the gun before stroking to the other side in hopes of winning the race, traders piled into shares and Treasuries once the US leader delivered a more conciliatory tone than expected," he added.

"As we know from recent history, Trump uses these tariffs as a blunt instrument and a negotiating lever to pull to get his way on the world stage," Matthew Ryan, the head of market strategy at Ebury, wrote in a note on Wednesday, adding that his base case scenario was for the US and Denmark to reach a compromise and for the TACO trade to return.

Chatter about TACO — which sparked a record-breaking rally in stocks after Trump walked back some of his Liberation Day tariffs last April — began to pick up on Tuesday as markets digested Trump's latest Greenland threats.

Analysts on JPMorgan's international markets intelligence desk said they were reading Trump's latest tariff announcements "from an 'Art of the Deal'" perspective.

"Trump creates noise and throws in a maximal stance designed to trigger negotiation and create leverage/urgency," the bank wrote in a client note, adding that it foresaw a US agreement with Denmark as the most likely scenario.

BCA Research estimated there was a 40% chance Trump's new tariffs wouldn't be implemented at all, possibly by Trump's "own retreat."

"Global stocks would fall, while US treasuries and the dollar would fall, but the administration would then change course, as it did after Liberation Day," Matt Gertken, the chief geopolitical and US political strategist at the firm, wrote.