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On Friday, the Supreme Court struck down most of the tariffs the Trump administration had imposed over the past year. The question before the court was not whether the tariffs themselves were illegal, but whether the mechanism by which they were enacted was legal. By a 6-3 vote, the Justices determined that the implementation of tariffs under the International Emergency Economic Powers Act (IEEPA) went beyond the authority granted. The IEEPA allows a president to act in times of genuine national emergencies rather than to take broad trade policy actions. For example, it was enacted during the post-9/11 war on global terrorism and after the Russian invasion of Ukraine.
So, now we know the Supreme Court’s tariff decision. But what will it mean for markets and trade going forward?
What About Collected Tariffs?
The IEEPA was the legal justification the administration used to implement reciprocal tariffs on most countries and additional drug-related tariffs on Mexico, Canada, and China. The Penn Wharton Budget Model, a bipartisan group that analyzes fiscal policy impacts, estimated that roughly $175 billion in tariff revenue was collected under IEEPA in the past year.
The Supreme Court did not weigh in on whether the collected tariffs need to be refunded. That question will shift to the lower courts, most likely the Court of International Trade, which is already hearing tariff-related cases. Treasury Secretary Scott Bessent said it could take “weeks or months” to resolve the tariff refund issue. But this process may actually last several months, especially if the initial decisions are appealed.
Are Tariffs Going Away?
The short answer is no. Despite this ruling, the administration’s plans to use tariffs to achieve better trade deals remain viable. Under Section 122 of the Trade Act of 1974, the administration can implement 15 percent tariffs for 150 days to target trade imbalances. The initial announcement from President Trump on Friday was for 10 percent tariffs. Over the weekend, that increased to 15 percent, effective immediately on all countries. After 150 days, Congress would need to vote to extend them. This tariff level will be higher for some countries than those previously faced and lower for others, particularly China.
The administration is also likely to use Section 301 of the 1974 Act, which targets unfair trade practices and requires a formal investigation by the Office of the U.S. Trade Representative. This is the same mechanism used to impose tariffs on China in 2019. These investigations typically take a few months.
If the administration relies on these two methods to implement tariffs, most of the tariffs struck down by Friday’s decisions will likely be implemented again later in the year. Reactions to these developments could affect the economy and earnings.
Uncertainty Remains
The Supreme Court decision provides some clarity on the future of tariffs and how they could be implemented. It also introduces new uncertainties in other areas. Domestically, companies don’t know if or when they will receive refunds. If collected in a timely manner, companies could choose to invest that cash back into their businesses, providing a boost for the economy. On the other hand, companies could be cautious and hold off on allocating capital toward future growth opportunities as they await further clarity. Similar uncertainty was an issue last year around executive decision-making on tariff implementation and the negotiation of the budget bill.
Internationally, the tariffs were originally implemented to force trade partners to the negotiating table. Some agreements have been completed while others are ongoing. How our trade partners react to the ruling and whether they view implementation of Section 122 or 301 as providing similar negotiating leverage or as an escalation of the situation will be important for global trade dynamics going forward.
Market Volatility Ahead?
Although policy risk settled down after the Liberation Day pause a year ago, tariff headlines are likely to increase moving forward. In the short term, headlines tend to drive markets up and down. But over the long term? Fundamentals always carry the most weight for market performance. Currently, the health of corporate America is driving positive fundamentals. Fourth-quarter earnings are on pace to grow more than 13 percent. That is a good place to start for a supportive market backdrop. Better earnings from more sectors, industries, and company types are leading to more breadth in market returns. We anticipate that trend is likely to continue.
