ANALYSIS-Market risk mounts as Supreme Court weighs Trump’s emergency tariff powers

NEW YORK, Jan 8 (Reuters) – A forthcoming U.S. Supreme Court decision on President Donald Trump’s use of emergency tariff powers could jolt financial markets, especially if the justices strike down the tariffs.

The case, which could come as early as Friday, is set to determine whether Trump can invoke the International Emergency Economic Powers Act (IEEPA) to impose tariffs without congressional approval.

During November arguments, the justices signaled skepticism about Trump’s authority to impose the tariffs. Online betting markets now give a 30% chance the court will uphold the tariffs.

Striking down the tariffs could impact government revenue, pushing Treasury yields higher and unleashing new waves of volatility across equity markets, analysts and investors said.

“We’ve never seen a ruling that has such an economic impact,” said Eddie Ghabour, CEO of KEY Advisors Wealth Management. “If the Supreme Court rules against the President and makes us (government) pay back all the tariffs that would be a major headwind for markets. This would be the equivalent of sucking liquidity out of the system.” 

When Trump announced tariffs last April, stocks fell nearly 5% and Treasury yields initially tumbled as investors responded to the uncertainty by fleeing to safe-haven assets. Stocks have since recovered, rising more than 16% in 2025, hitting fresh record highs along the way.

AN INITIAL BOOST FOR STOCKS, BUT RISKS REMAIN

Some investors believe stocks could bounce if the court rolls back existing tariffs, especially for companies that had to absorb high-import costs.

A ruling requiring refunds would bolster their bottom lines, with importers expected to receive an inflow of $150 billion to $200 billion over the coming months, investors said.

“Stocks would probably benefit in general,” said John Velis, head of Americas macro strategy at BNY Markets. “Sectors in particular would (include) retail as well as consumer goods. Electronics also would probably do well.”

Some advisors are already putting money to work in small caps on expectations that the Federal Reserve’s actions will keep a lid on the 10-year yield while injecting liquidity, and therefore, spur economic growth.

“That is as bullish as it gets,” said Key Advisors’ Ghabour, who established a 4% stake in smaller stocks in mid-December. “If these small companies get tariff relief on top of that it will be like putting rocket fuel on a fire.”

The Russell 2000, which tracks small-cap stocks, ended 2025 11.3% higher, and is up 4% so far this year.

Any knee-jerk reaction in equities following the decision could be short-lived, some investors said, cautioning that the administration would quickly use alternative provisions to reimpose the levies if the tariffs are struck down.

“In the short term, this will be noise,” said John Pantakidis, a managing partner at Twin Focus Capital. “The market is ignoring that the president keeps threatening more tariffs.”

According to David Seif, chief economist for developed markets at Nomura, Trump could turn to five other legal routes to impose tariffs, some up to 15%. “Certainly by the end of 2026, we would have a tariff regime that looks almost exactly the same as what is there,” he added.

A POSSIBLE FISCAL FALLOUT

The possibility of lower tariffs, and therefore lower revenues for the government, could put pressure on government bonds pushing their yields higher. High yields can be a headwind for stocks as investor demand shifts to bonds.

Trump has said it would be an “economic disaster” if the tariffs are overturned. It’s not clear whether companies impacted by the levies would be entitled to refunds from the government.

Phil Blancato, chief market strategist at Osaic, said a ruling requiring refunds could prompt more Treasury issuance.

JPMorgan has estimated that annualized tariff revenue could drop to about $250 billion from roughly $350 billion as the administration pivots to alternative legal avenues that would impose lower rates, reviving worries about the U.S. fiscal outlook.

On prediction markets platforms like Polymarket, a number of gamblers have placed bets on the ruling. For instance, one user account on Polymarket has built up positions worth nearly $50,000 tied to the Supreme Court’s decision, and stands to make a sizable profit if the tariffs are overturned by the court.

If the prediction markets are wrong and the court upholds Trump’s tariffs, another market sell-off could follow. Allowing Trump to threaten to impose tariffs in ways that investors view as unpredictable would unsettle markets, said Alex Morris, chief investment officer at F/m Investments.  

Nevertheless, managers like Jensen’s Bond have already taken steps to limit tariff-related risks, dropping companies that could be vulnerable.

“Our evergreen strategy is to focus on businesses that have supply chain resiliency,” said Bond, adding that it is particularly crucial in a high-tariff environment.

(Reporting by Laura Matthews in New York and Suzanne McGee in Rhode Island; Additional reporting by Davide Barbuscia and Anirban Sen in New York; editing by Megan Davies and Diane Craft)