Don't celebrate too early if the U.S. Supreme Court overturns Trump's tariffs? Wall Street expects the market reaction to be fleeting.

The U.S. Supreme Court ruled that the global tariffs implemented by Trump last year under the Emergency Powers Act are unlawful, triggering asset price fluctuations. However, Wall Street generally believes that the market’s positive reaction may be short-lived. Traders are quickly shifting their focus to the White House’s alternative plans—Trump’s administration has stated it possesses other legal tools to reimpose tariffs.

According to CCTV News, on the 20th local time, the U.S. Supreme Court ruled that the tariffs imposed by the Trump administration under the International Emergency Economic Powers Act (IEEPA) lacked clear legal authorization. This ruling halts most of the tariffs currently in effect, including the so-called “Fentanyl tariffs” and the retaliatory tariffs first announced in April last year. Following the announcement, the dollar index declined, U.S. Treasury prices fell, and major U.S. stock indices widened their gains.

Media outlets believe that overall, the market’s reaction to the ruling has been relatively mild. About an hour after the ruling was announced this Friday, the yield on the 10-year U.S. Treasury rose by approximately 2 basis points, the Bloomberg U.S. Dollar Spot Index fell 0.2%, ending a four-day winning streak, and the S&P 500 index’s intraday gains were less than 0.8%. One key reason for the relatively moderate volatility in stocks, bonds, and currencies is that the market had already been inclined toward this outcome, and Trump subsequently stated that he has backup plans.

Commentators suggest that the ruling should have a particularly negative impact on the U.S. bond market. Tariff revenues had been used to offset the effects of Trump’s tax cuts, and the ruling eliminates this revenue source, potentially further widening the federal budget deficit of $1.8 trillion. The Tax Foundation estimates that the tariffs overturned would have generated over $1 trillion in revenue over the next decade.

Strategists say that although Trump has at least five alternative legal tools to reimpose tariffs, regardless of the method, it will put upward pressure on long-term U.S. Treasury yields.

Michael Bailey, Research Director at wealth management firm FBB Capital Partners, believes that the ruling may indeed remove some uncertainty for investors. Recently, concerns about artificial intelligence (AI) and declines in software stocks have already pushed the Supreme Court review and the entire tariff issue to a secondary position. Investors either anticipated the Supreme Court would overturn Trump’s tariffs or have lost interest relative to other market developments.

Wall Street expects the market’s positive reaction to be short-lived

Several strategists point out that the market’s optimistic response to the ruling may be fleeting. Ian Lyngen, Head of U.S. Rates Strategy at BMO Capital Markets, said, “The Supreme Court’s decision was widely anticipated by market participants, so it’s not surprising that the U.S. interest rate market’s reaction was limited.”

Aroop Chatterjee, Managing Director at Wells Fargo Securities, commented, “We expect the relief from the Supreme Court ruling to be temporary, mainly as a positive risk factor through reduced uncertainty. The government retains important tariff-setting authority through other regulations, but some of these methods are untested, and others will take time. We still believe the government will replace most tariffs through other means, but this is a medium-term matter.”

Dave Mazza, CEO of Roundhill Financial, warned, “The market will see the tariff repeal as a short-term positive because it removes immediate supply chain taxes and eliminates an unresolved factor. But this is not the end of the tariff story; it’s just the beginning of the next chapter. Future paths may involve more, not less, legal and policy reversals.”

Matt Maley, Chief Market Strategist at Miller Tabak + Co LLC, noted, “Many investors had already expected the Supreme Court to rule this way, so they seem more focused on the Middle East situation this weekend. But I do think it has eliminated some uncertainty. What we’re seeing in the market is more of a ‘good news is exhausted’ reaction.”

Concerns over worsening fiscal deficits in the bond market

The report suggests that the Supreme Court ruling has sparked concerns in the $30 trillion U.S. bond market, as it could increase the federal budget deficit and add fuel to an economy already dealing with high inflation. After the ruling, long-term bonds most sensitive to fiscal risks led declines, with the 30-year U.S. Treasury yield rising by a basis point to 4.75% before narrowing its gains.

Steven Zeng, a rate strategist at Deutsche Bank, said, “This is a net negative for fiscal outlooks. Without tariff revenue, deficits could be higher than previous baseline estimates. This means the Treasury will need to issue more bonds to fill the fiscal gap, which is why Treasury yields are rising.”

Refund issues become another focus. The Supreme Court has left the refund question to lower courts. Economists at the University of Pennsylvania estimate that over $175 billion in tariff revenue faces refund risks.

Jane Foley, Head of FX Strategy at Rabobank, warned, “While the White House is expected to find other ways to push tariffs forward, there will be concerns about refunds, which could unsettle the U.S. bond market. Given the already weak fiscal situation in the U.S., this could shake the dollar.”

James Athey, Portfolio Manager at Marlborough Investment Management, said, “I think this news is slightly negative for U.S. bonds. It has a short-term negative impact on the budget, so it should be bearish for Treasuries. But it’s hard to see how it will actually play out—very complex.”

However, Blake Gwinn, Head of U.S. Rates Strategy at RBC Capital Markets LLC, holds a different view. He believes the ruling is a “growth-positive, risk-positive narrative,” which will ease corporate burdens, “and should outweigh any ideas that yields should fall due to inflation or Fed rate cuts.”

Political uncertainty becomes a new focus

Wall Street previously noted that, besides the IEEPA dismissed by the Supreme Court, Trump has multiple legal tools available. For example, he could invoke Section 232 of the Trade Expansion Act of 1962 to impose so-called national security tariffs, or initiate investigations under Section 301 or Section 201 of the Trade Act of 1974, but these methods would take longer to implement.

Neil Dutta, Head of Economic Research at Renaissance Macro, said the issue now is more political than economic.

Dutta stated, “I don’t think we’ve heard the last of Trump and tariffs. He has a broad legal framework at his disposal. The (IEEPA) he used is the weakest legally. The problem is, if he doesn’t reinitiate tariff threats, he essentially looks lame. If he decides to back down, he’s basically finished politically.”

Valentin Marinov, Head of G-10 FX Research and Strategy at Credit Agricole, said, “Before the Supreme Court ruling, we expected unfavorable decisions on Trump’s tariffs could severely undermine his trade policy, and the resulting policy uncertainty might harm U.S. growth in the short term. FX market reactions have been quite mild. I suspect this is due to lingering uncertainty around Iran tensions.”

Win Thin, Chief Economist at Bank of Nassau 1982 Ltd, summarized, “Prepare for a period of uncertainty as details about potential alternative tariffs emerge over the coming weeks. This is another reason many Fed officials prefer to keep interest rates steady, but I continue to watch economic weakness, which will eventually prompt rate cuts.”

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