The Supreme Court dealt the Trump administration and its tariff agenda a formidable legal setback last Friday. In a 6–3 decision, the court held that Trump did not have the specific legal authority to impose tariffs that he claimed he did.
The decision, which narrowly focused on the use of the International Emergency Economic Powers Act (IEEPA), does not end tariffs altogether. It does, however, force the White House to shift legal tactics.
Markets were not blindsided. Betting market coverage on Polymarket, for example, had been pricing the administration’s odds well below one-third for months.
The immediate equity market reaction on Friday was mild relief: stocks rose after the decision. Investors generally prefer free trade and worry about the potential for trade wars to escalate.
Then, over the weekend, Trump said he would raise the new global import surcharge from 10% to 15%.
Stocks ended the day lower on Monday, with the S&P 500 declining approximately 1%. Tariff uncertainty appeared to play a role, although ongoing concerns around AI impacts on the economy may have been the bigger factor.
Overall, we view the market’s muted reaction to the tariff drama as rational—and a good sign that we have moved beyond the tariff obsession.
As we discussed back in mid-December (Stocks Rise on Lower Inflation as Tariff Fears Subside), the overall impact of tariffs has been wildly exaggerated by many.
The April 2025 stock market sell-off was, in retrospect, an excellent buying opportunity. In our view, much of the hysteria at that time was fueled by financial media animosity to Trump.
Mainstream media amplified the viewpoints of politically aligned economists like former Treasury Secretary Larry Summers, who sought to paint tariffs as a catastrophic policy error that would simultaneously lead to depression, inflation, and a market crash.
Of course, none of these dire forecasts came to fruition, despite the subsquent imposition of sizeable tariffs. Growth has been robust, inflation has fallen, and stocks have risen.
The rule of law continues
There is an additional element of Trump’s reaction to the decision that is a clear market positive.
Trump has been accused of executive overreach—with many of his critics casually using terms like “dictator,” “autocrat,” “authoritarian,” or worse.
A likely worst case scenario for markets would be if Trump simply ignored the Supreme Court ruling, which could have created a Constitutional crisis. Instead, he is respecting the decision even if he disagrees with it and is going back to the drawing board.
Like almost every President before him, Trump has in some cases tested the limits of his executive authority. When the Supreme Court says he has gone too far, for better or worse, he complains… but recalibrates.
To be clear, this was not a black-and-white case. At a minimum, the administration was acting on a plausible interpretation of the law. Justices Clarence Thomas, Samuel Alito and Brett Kavanaugh all sided with the administration and produced strong dissenting opinions.
Putting tariffs in perspective
Tariffs are real. They can dent margins, reshuffle supply chains, and create pockets of inflationary pressure. But at the macroeconomic level, we see three structural reasons that tariffs are less impactful than headlines may suggest.
First, tariff revenue, while it surged, remains small compared with the federal government’s main tax engines. In fiscal 2025, total federal receipts were about $5.2 trillion, while customs duties were just below $200 billion—less than 4% of the total.
Second, even in an aggressive tariff regime, the administration has shown it modifies tariffs when they risk serious economic disruption. That makes tariffs more like an adjustable policy dial than a fixed shock.
Third, the U.S. is a services-heavy economy. Private services-producing industries are more than 70% of GDP, while private goods-producing industries are about 16%.
Tariffs generally hit physical goods, and goods do matter—but the macro ceiling is lower in a high-tech, services-dominant economy than in a manufacturing-led one.
What Trump can do next
The Supreme Court took away one shortcut—IEEPA-based tariffs. It did not take away the whole tariff toolkit.
The reason prediction markets had been so skeptical of Trump’s chances is that, as Chief Justice John Roberts wrote, the IEEPA never actually mentions "tariffs" or "duties."
Roberts argued that two vague words ("regulate importation") cannot reasonably be read to give a president unlimited power to tax imports from any country, at any rate, forever.
The court also invoked the "major questions doctrine" — the principle that Congress must speak clearly when handing over enormous economic power to the executive branch. This clarity was said to be missing.
The administration may have been shot down over IEEPA, but it can now turn to several other legal paths forward. These include:
Section 122 (Trade Act of 1974): Trump already signed a 10% global tariff under this law the same day as the ruling. The catch: these tariffs can only last 150 days unless Congress votes to extend them—a significant constraint.
Section 232 (National Security): Trump can impose tariffs by declaring specific imports a national security threat. These are harder to challenge legally and have no time limit. His steel and aluminum tariffs already use this authority and were untouched by the ruling.
Section 301 (Unfair Trade Practices): Tariffs on China imposed under this authority since 2018 remain fully intact. Trump could expand their use against other countries by launching unfair trade investigations, though the process takes months.
Congressional approval: Trump could ask Congress to pass legislation explicitly authorizing tariffs—giving them the clearest legal footing—but that would be politically slow and uncertain.
Trump retains real tariff power but has lost some flexibility. The era of instant, unlimited, emergency tariffs is over. Future measures require either accepting time limits, slower legal processes, or congressional cooperation
Kavanaugh’s roadmap
Justice Kavanaugh’s dissent is attracting attention because it in many ways spelled out how the administration can get what it wants without judicial interference.
Kavanaugh essentially handed Trump a checklist. By naming the alternative laws that would authorize similar tariffs, including the three above, he told the administration exactly where to go next. Trump acted within hours.
Kavanaugh also argued the major questions doctrine should not apply in foreign affairs, signaling that tariffs packaged in national security language would likely survive court scrutiny.
