A Supreme Court tariff hearing Wednesday provides the biggest legal and policy challenge of President Donald Trump's administration, with economic fallout likely to follow. As for its impact on markets, it's complicated. The U.S. top court heard arguments on whether the White House can flex its tariff muscles under the International Emergency Economic Powers Act, which allows the president to regulate international commerce but does not specifically authorize tariffs. There's little expectation that the justices will be in a hurry to issue a ruling, so any impacts are likely to be months away. But speculation already is running rampant: Will the court throw out the tariffs entirely and force administration to issue rebates to importers who have had to pay the duties? Will it allow the levies to stand, thus expanding executive powers over trade issues? Or will it find a middle ground, perhaps upholding some of the tariffs, such as punitive ones aimed at countries identified as fentanyl producers, while tossing others? Wall Street is bracing for the fallout, with sweeping impacts expected but to an unknown degree. Justices cast doubt during Wednesday's hearing that the tariffs are legal. Stocks rose following the legal developments and bonds sold off, pushing Treasury yields higher. "The court's decision could have broad-sweeping implications for activity, inflation, Fed policy, rates and the dollar," Bank of America economist Stephen Juneau said in a note. "If the tariffs are fully or partially struck down, there would be positive and negative effects on near-term growth." At the same time, Trump administration officials have asserted that even if they lose at the Supreme Court, there are other legal provisions they can employ for tariffs. In that case, it likely would create winners and losers depending on how Trump proceeds. AI analytics firm Reflexivity said that in the case of a Trump loss, imported consumer goods, small business, construction and tech would be among the winners, while domestic manufacturers would be laggards. Should the president prevail, Reflexivity sees nondurable manufacturers as well as protected industries such as steel and aluminum winning. What happens next? Traders on Polymarket were assigning just a 26% chance that the duties will be upheld, posing additional questions. Paramount among them will be whether the court will take the next step and make the administration refund the tariffs already paid. The U.S. collected some $195 billion in customs duties during fiscal 2025, more than doubling the prior year's total. Analysts suggest the payback total could be near $100 billion, or the share of total customs collections attributed to the Trump tariffs. "We don't see much of a legal argument for this approach, but our general view is that SCOTUS can do whatever they want, and they might want to avoid a costly and chaotic refund process," Wolfe Research wrote. "It's not often that a SCOTUS ruling costs taxpayers $100b, after all." As for investors, the legal wrangling comes out a touchy time as concerns rise over artificial intelligence-fueled market valuations. The S & P 500 is trading around 23 times forward earnings, well above its five- and 10-year averages, according to FactSet. A messy legal fight over tariffs won't be welcomed, though on net having them struck down would provide both positive and negative impulses for economic growth. Should rebates be ordered, that would add to debt and deficit pressures at a time when the White House has been championing a modest decline in red ink during 2025. That in turn could generate higher interest rates as investors demand more yield for holding U.S. debt and the Federal Reserve becomes averse to additional interest rate cuts . "Uncertainty and unusual have been the two marquee words of 2025," said Mitchell Goldberg, head of ClientFirst Strategy. "If the Supreme Court rules against the administration, I don't think it's the end of the road for tariff policy, it's just another bump in the road."
