S&P 500 Could Crash If The Supreme Court Strikes Down The Trump Tariffs

DNY59/iStock via Getty Images

From “Tariffs are bad” to “ignore the Tariffs”

The S&P 500 (SP500) crashed by 20% in March and April around the Liberation Day tariff announcement. The expectation was that the reciprocal tariffs (at the April 2nd level) would be stagflationary – inflation would increase, and growth would slow, possibly even turn negative.

Thus, the market viewed the reciprocal tariffs as a major negative.

However, after the temporary delay in reciprocal tariffs and subsequent trade negotiations, the market found the bottom and started to rise. From the April bottom, the market continued to rise, ignoring the tariffs – even after the ultimate level of tariffs (after the negotiations) was set at a level not much lower compared to the April 2nd level.

One of the reasons for the positive stock market performance during this period is that the reciprocal tariffs have not affected inflation or growth yet. Thus, the market continues to ignore the tariff reality – until the data starts showing the damage.

Now, Tariffs are good?

However, the case could be made that the reciprocal tariffs are actually good for the stock market. Thus, if the Supreme Court declares the reciprocal tariffs to be illegal, the stock market could actually crash.

First, why the reciprocal tariffs could actually be good for the stock market?

Inflation temporary – no stagflation?

The Fed’s view is that any inflation related to the tariffs will be temporary or a gradual one-time effect played out over several months as different industries adjust their prices.

Thus, the Fed can look through the tariff-related inflation, meaning it will not need to turn hawkish as inflation starts rising. This will allow the Fed to focus more on the labor market mandate and lower the interest rates to ensure that growth remains solid.

Essentially, this could mean that the reciprocal tariffs might not be stagflationary as initially expected. The inflation shock will be temporary, while the Fed will support growth.

Tariffs to boost growth in 2026 and beyond via DFI?

The reciprocal tariffs are the cornerstone of Trump’s economic policy. Specifically, during the bilateral trade negotiations, many countries pledged to invest heavily in the United States as part of the trade deal – due to the threat of higher tariffs. This direct foreign investment, or DFI, could significantly boost the US economic growth in 2026 and several years thereafter, leading into the 2028 elections.

It’s not just the countries that pledged to invest in the US – the Trump administration was able to secure the commitments to invest from many private companies, for example, a $600B investment from Apple.

The White House estimates that the total commitment to invest is currently at $8.7 trillion.

Obviously, if these commitments and pledges to invest in the US are implemented, the US economic growth is likely to accelerate.

Tariffs to reduce the budget deficit?

The White House also reported that the tariff-related revenue for August was a record $31B, with the YTD number now at $158B. Even the Congressional Budget Office estimates that tariffs could reduce total deficits by “$4 trillion over the next decade.”

This is positive for the stock market as it’s expected to keep the long-term interest rates low or at least prevent them from sharply rising.

Are tariffs good for the geopolitical situation?

The Trump administration has been using the threat of tariffs to ease the geopolitical situations and to end wars. Thus, this is also positive for the stock market, at the margins.

The Trump tariffs are likely illegal

However, it looks like the Supreme Court is likely to uphold the decisions from the Court of International Trade and the Federal Circuit Court, which declared the Trump tariffs to be illegal.

• The US Constitution (Article 1, Section 8) gives the right to regulate foreign commerce and “levy duties” to the Congress.
• However, Congress gave up some of these duties to the President via different Acts, one of them being IEEPA 1977, which “grants the President broad powers to regulate imports/exports during a declared national emergency.”
• So, President Trump invoked the IEEPA Act of 1977 to impose the reciprocal tariffs by declaring the national emergency (trade deficit, fentanyl, crime)
• However, on August 29th, the Federal Circuit Court ruled that IEEPA does not authorize tariffs – “to regulate imports/exports” is not the same as “impose tariffs.”
• The case is now going to the Supreme Court.

What is the Supreme Court likely to rule?

The issue might be centered around the Major Questions Doctrine, which states that:

Congress must clearly authorize executive agencies or the President to make decisions on issues of vast economic or political significance.

Obviously, the reciprocal tariffs have an enormous economic and political significance, which suggests that Congress should authorize them.

If the Supreme Court moves past this point, the IEEPA statutory issue will be whether “to regulate imports” includes “to levy the tariffs,” which the Federal Circuit Court rules against. This legal issue can be argued from both sides; however, in my opinion, even if the President is given the statutory authority to levy tariffs, the political and economic significance of this action would still be too great under the Major Questions Doctrine. Thus, the Supreme Court might view the statutory power to levy tariffs under IEEPA (in this case) as irrelevant.

Further, no other President has ever used IEEPA to implement tariffs. However, the Supreme Court has consistently used the Major Questions Doctrine to strike down other “questionable” policies, for example, Biden’s student loan forgiveness plan in 2023, EPA regulation of greenhouse gases in 2014, and FDA regulation of tobacco in 2000. Which suggests that the Supreme Court could also uphold the Federal Circuit ruling that Trump tariffs are illegal.

Note, the Supreme Court is conservative with a 6-3 majority, which could favor Trump.

Implications

One would think that the Supreme Court decision to strike down Trump tariffs would be positive for the stock market. However, the reaction is likely to be negative and possibly cause a major shock to the system, producing a significant correction.

The entire Trump economic plan is based on tariffs, and the markets have started to realize this. If these tariffs are ruled to be illegal:

• Long-term interest rates (US10Y) could sharply increase as the tariff revenues are 1) refunded and 2) removed from expected deficit reduction calculations.
• stock market could sharply fall as 1) the expected investments are canceled, which would reduce the growth prospects for 2026 and beyond, and 2) interest rates increase.

The market reaction on Monday after the Federal Circuit Court ruling is consistent with this theme: 1) interest rates increased, 2) the stock market fell, and most importantly, 3) gold broke out to a new record. The rising gold price is the key reflection of the likely volatility ahead.

Tariffs are in place until October 14th, and the Supreme Court is likely to rule before that deadline.

The Supreme Court could rule that the reciprocal tariffs are illegal, but it might not require the Treasury to refund the collected tariffs. This ruling could even deepen the crisis as it would open up more legal actions, possibly in international courts.