Will the TACO trade save markets from Trump's Greenland threats? Here are 3 scenarios analysts are eyeing.

• Markets are selling off on Tuesday, but some think Trump's latest comments could revive the TACO trade.
• TACO stands for Trump Always Chickens Out, the idea that the president's threats are mostly bluster.
• Forecasters think a diplomatic negotiation between the US and Denmark is the most likely outcome.

Is TACO back on the menu?

That is, Trump Always Chickens Out, or the idea that the president's aggressive policy tactics are mostly bluster aimed at getting a party to the negotiating table.

That's the question investors are mulling this week as the market swoons amid Trump's fiery comments about the future of Greenland, which he has said the US needs to control for national security.

The White House has told investors not to count on Trump backing down before, but his latest attempt to put pressure on Denmark has Wall Street talking about the president's notorious negotiation style again.

Trump's most recent maneuver has been to threaten eight European nations with 10% tariffs starting in February, ramping up to 25% in June if no deal on Greenland is reached.

To some forecasters, the Greenland situation is clear: It's another opportunity for investors to position for the TACO trade.

"I think we need to read this from an 'Art of the Deal' perspective," analysts at JPMorgan's international markets intelligence desk wrote in a note on Tuesday. "Trump creates noise and throws in a maximal stance designed to trigger negotiation and create leverage/urgency."

"The market wants to see if today is TACO Tuesday," the bank's market intelligence team added.

"How much uncertainty investors can stomach is a good question, but the resolve in the FOMO and TACO trade (the belief that President Trump is bluffing on Greenland and is only working to secure a 'deal') has proven time and again to be very difficult to break," David Rosenberg, a top economist and the president of Rosenberg Research, wrote in a note to clients on Tuesday.

Amid talk of a TACO trade revival, analysts say they see a handful of outcomes from Trump's tough talk on Greenland. Here are three ways forecasters see the situation playing out.

1. Trump reaches a deal with Denmark

The US reaching an agreement with Denmark that could expand US presence in Greenland — such as by getting access to the territory's natural resources — looks like the most likely outcome, JPMorgan said, pegging the scenario with a 55% probability.

"We know Trump opens with a maximal stance, designed to trigger negotiation and create leverage. This is no different," the bank said, noting that the timing of the tariff threats looked "not coincidental," given that the World Economic Forum is in full swing this week.

Analysts added that a sale of Greenland looks "less likely" due to the need to get Denmark's approval, and the US using military force to take Greenland looks "highly unlikely," since it would draw pushback from Republican lawmakers and voters. The US attacking another NATO member could also open the door to further aggression from the bloc's rivals, JPMorgan added.

2. Trump will walk back tariffs

There's a 40% chance Trump's new tariffs won't be implemented at all, possibly by Trump's "own retreat," according to Matt Gertken, the chief geopolitical and US political strategist at BCA Research.

Gertken added that he believed there was a 70% chance the situation in Greenland would have a "non-military" solution, and a 30% chance that solution would involve a short-term trade war with Europe.

"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," he wrote in a client note on Monday.

Christopher Granville, a managing director at TS Lombard, added that he believed the most likely outcome was a "truce" between the US and Europe, with the US likely suspending tariffs as negotiations over Greenland stretch on.

That was what happened when Trump first introduced tariffs on Mexico and Canada last year, Granville added, later pointing to political pressures from the coming midterm elections, which could incentivize Trump to lower tariffs.

"Some commentators may slap the TACO label on any such truce that could be agreed at this week's in-person meetings in Davos between Trump and various European leaders," Granville said, though he noted that the situation wouldn't be a "TACO for real" scenario, since the US wasn't backing down on Greenland entirely.

3. The Supreme Court will upend Trump's tariffs

The expected Supreme Court ruling on Trump's tariffs could also come into play.

BCA estimated there was around a 50% chance the Supreme Court could strike down Trump's tariffs, up from a 30% chance the firm had predicted earlier.

"Normally the court would defer to the president on international issues. But now the president threatens to entangle the court in lawless behavior that threatens the court's credibility and the constitutional balance of powers," Gertken said, pointing to Trump's threats against the NATO alliance. "So we have less confidence that the court will defend the president's stance."

JPMorgan's international market intelligence team said the latest tariff threats were "riddled with challenges."

"First, the proposed tariffs are based on IEEPEA, which the Supreme Court could imminently rule to be illegal in their application. Second, I would think it practically impossible to tariff 6x EU countries at a different rate to other members, given the freedom of movement of goods which structurally exists within the EU," the bank's Matthew See wrote.