Supreme Court's Pending Tariff Ruling Could Trigger Stock Market Volatility—Here's Why

Key Takeaways

• A potential Supreme Court rejection of Trump’s tariff authority under the International Emergency Economic Powers Act (IEEPA) could force the government to repay approximately $90 billion in collected revenue
• The administration’s tariff policies have coincided with deteriorating labor market conditions, rising unemployment, manufacturing contraction, and weakening consumer sentiment throughout 2025
• Rather than causing a depression-like crash, market decline would more likely stem from massive government borrowing needs to refund tariff revenues, driving Treasury yields higher and reducing equity valuations
• The S&P 500 has gained 17% year-to-date despite these economic headwinds

The Economic Data Contradicts Administration Claims

The Trump administration’s justification for tariffs rests on two pillars: constitutional authority and economic benefit. Yet recent economic indicators paint a different picture.

Treasury Secretary Scott Bessent characterized tariffs as separate from taxation, contradicting standard economic definitions. Most major dictionaries classify tariffs as taxes on imported goods. More importantly, Bessent argued the policies would strengthen labor markets and manufacturing. The data suggests otherwise.

Since baseline tariff implementation in April, the U.S. economy has shown consistent weakness across multiple indicators:

• Hiring velocity has decelerated to decade-lows (pandemic period excluded)
• The unemployment rate reached 4.4% in October, marking the highest level in four years
• Manufacturing output has declined for nine consecutive months
• The University of Michigan Consumer Sentiment Index averaged 57.6 in 2025—the lowest annual average on record
• Inflation has worsened every month since April

These concurrent deteriorations raise questions about the tariff strategy’s effectiveness. Consumer spending represents approximately two-thirds of GDP, making sentiment shifts particularly consequential for economic momentum.

The Legal Challenge and Market Mechanics

The Supreme Court’s pending decision specifically addresses whether the president possessed authority to impose tariffs under the 1977 IEEPA—a statute that never explicitly mentions tariffs or grants such power. The Court of International Trade ruled against the administration in May, the appellate court concurred in August, and the Supreme Court heard arguments in November with apparent skepticism from most justices.

If the Court rules the tariffs illegal, the government faces a substantial fiscal problem: approximately $90 billion in IEEPA-collected revenue would require repayment. Companies including Costco Wholesale have already filed claims seeking reimbursement.

This fiscal obligation wasn’t budgeted. To cover it, the Treasury Department would issue additional debt securities. Bond investors, already concerned about mounting federal deficits (ironically, a problem tariffs were intended to address), would demand elevated yields to compensate for increased credit risk. Higher Treasury yields typically pressure equity valuations by making fixed-income investments more competitive.

Why Markets Matter: Focus on Long-Term Principles

The S&P 500 has advanced despite economic uncertainty, demonstrating market resilience. However, forced debt repayment scenarios could trigger meaningful but temporary pullbacks.

Historically, the S&P 500 has delivered approximately 10.4% annualized returns over 30-year periods. Regardless of near-term Supreme Court outcomes, investors maintaining long-term horizons typically benefit from staying invested through political and economic cycles. Tactical volatility around specific policy decisions often proves less consequential than consistent exposure to diversified equity portfolios.

The coming weeks will clarify the Court’s position on executive tariff authority. Meanwhile, markets will likely remain sensitive to Treasury yield movements and economic data releases.