What if tariffs are overturned? Don't worry, it's not happening so soon

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Tariffs Ignite the Capital Markets

The moment we've all been waiting for is approaching. Tomorrow, the US Supreme Court is very likely to issue an opinion on the legality of tariffs. Will tariffs stay or go? Will interest rates rise or fall? More importantly, what does it mean for US stocks?

According to CNBC, the US Supreme Court has officially set Friday Eastern Time as the opinion release date, meaning the much-anticipated tariff ruling could be announced as early as this week. Prior to this, the S&P 500 Index had already rebounded about 40% from its low and set new highs.

CNBC believes that this strong performance is mainly driven by renewed confidence in AI, as well as the market's optimistic expectations for a partial rollback of tariffs by the Trump administration. Currently, the core focus of the market is: if tariffs are ruled illegal, although there will still be long-term uncertainty, the short-term asset pricing logic could undergo a significant reversal.

Specifically regarding equity assets, according to the chief equity strategist at Wells Fargo, if tariffs are overturned, the EBIT of S&P component stocks is expected to increase by about 2.4% year-on-year this year. In terms of sector performance, consumer goods industries that rely heavily on overseas imports and bear a heavy tax burden—such as clothing, toys, home goods, as well as industrial and transportation sectors—are expected to see significant relief from cost pressures and profit uncertainty.

On the contrary, raw materials and some domestic manufacturing industries previously protected by trade protection policies may lag behind due to the loss of price barriers.

However, the situation in the bond market is not so straightforward. According to JPMorgan's strategy team, while removing tariffs can ease inflationary pressures, it also means the government will lose a significant source of revenue, which could reignite market concerns over the federal budget deficit. This, in turn, may push up long-term Treasury yields and steepen the yield curve.

On the other hand, the Morgan Stanley team has offered a contrary view, suggesting that investors should closely monitor the specific timing and scale of potential tax rebates, as this directly affects Treasury issuance demand. An initial sell-off in the bond market may be clear but also brief, and the market could ultimately see a "buy the fact" reversal, pushing yields lower again.

Jason believes that the likelihood of tariffs being completely overturned is low and that an intermediate path is more likely. For example, extending the grace period to allow Trump to obtain congressional authorization, or keeping the current tariffs unchanged while not permitting the White House to impose additional tariffs. It is also possible, as JPMorgan suggested, that Trump could use existing, temporary, or other mechanisms similar to Section 301 investigations to impose tariffs through compliant procedures. Regardless of which scenario plays out, the overall direction of US trade protection will not change. After a period of short-term volatility, the stock market will quickly return to its current focus on AI and earnings. Therefore, I do not believe tomorrow's tariff ruling will have any long-term impact. There is also a high probability that there will be no surprises in the short term, and even if there is volatility, it should recover quickly.

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