Supreme Court Ruling on Trump Tariffs Could Reshape Market Dynamics

(Bloomberg) -- Investors are closely monitoring an impending ruling from the Supreme Court concerning the extensive tariffs introduced by former President Donald Trump in April. This decision has the potential to significantly influence both the stock and bond markets in the near future. In the context of a rising equity market, the S&P 500 Index has recently reached a new record high, marking a nearly 40% increase since its lows in April. This upward trend has been largely driven by developments in artificial intelligence and a reduction in some of Trump's more severe tariffs. Concurrently, Treasury yields have declined from their mid-2025 peaks, as market participants speculate that the Federal Reserve may continue to lower interest rates amidst a cooling economy. Should the Supreme Court determine that Trump overstepped his authority with the broad tariffs on various countries, the implication would be longer-term uncertainty. The White House could potentially reinstate similar tariffs through alternative legal measures. Market analysts suggest that the immediate response to a possible ruling against the tariffs could be relatively straightforward. A decision that eliminates these tariffs may bolster stock performance by enhancing profit margins and relieving some consumer pressures. On the flip side, Treasuries might face downward pressure as the anticipated economic stimulus complicates the Fed's interest rate strategy and could exacerbate the federal budget deficit. Wall Street is expected to receive insights soon, with the court's opinion day set for Friday, signifying an imminent announcement. Boost for Stock Earnings A ruling opposing the tariffs would likely provide a substantial increase in earnings for S&P 500 companies, with projections estimating a 2.4% uptick in earnings before interest and taxes in 2026 compared to last year. If the Supreme Court rules against Trump, investors may react positively, pushing up stock prices in reflection of improved profitability. Ohsung Kwon, Chief Equity Strategist at Wells Fargo & Co., noted that such a ruling could act as a catalyst for a market rally. Certain sectors are poised to benefit more directly from this potential outcome. Industries that heavily rely on imported goods, such as clothing and toy companies, have faced significant hardships due to tariffs and stand to gain the most if tariffs are lifted. Companies like Nike Inc. and Mattel Inc. are among those anticipated to see significant gains. Additionally, industrial giants like Caterpillar Inc. and Deere & Co. are expected to gain from tariff refunds. Financial institutions and consumer-related businesses are also likely to thrive as consumer confidence potentially increases. Potential Impact on Bond Markets Bond traders are preparing for possible volatility after the ruling, albeit expectations are that any such fluctuations would be short-lived. Last year, Treasuries experienced their strongest performance since 2020, gaining more than 6% as the market anticipated further Fed interest rate cuts. The revenue generated from tariffs had earlier mitigated some budget deficit concerns, but a rebound in fiscal anxieties could emerge if those tariffs were removed. According to JPMorgan strategists, such a scenario might lead to heightened long-term yields and steeper yield curves, although the effects are likely to be limited given the administration's potential to pursue alternative measures for reinstating tariffs. Market observers will be keenly looking for updates regarding the timing and dimensions of any refunds the government might be obligated to issue to importers. Analysts from Morgan Stanley have indicated that this information could significantly affect government Treasury bill sales. While predictions indicate that Wall Street has already accounted for the potential risks associated with the Supreme Court ruling, it is conceivable that bond market reactions, if any, may be short-lived. Analysts observed that investors might engage in a "buy the fact" strategy, subsequently driving yields lower.