Tomorrow! U.S. Supreme Court tariff decision day set; U.S. stocks and bond markets face a "major test"

The U.S. Supreme Court is about to make a final ruling on the legality of Trump's comprehensive tariff plan, a decision that will pose a major test for both the U.S. stock and bond markets. Analysts generally expect that if the court rules that the tariffs are illegal, the stock market could be boosted by improved corporate profit expectations, but the bond market may face selling pressure due to renewed concerns about fiscal deficits and a more complex Fed policy path going forward.

The Supreme Court has designated this Friday, Eastern time, as the opinion release date, meaning a ruling could come as early as this week. Since the tariff policy sparked market volatility, the S&P 500 index has rebounded about 40% from its low and hit new highs, with the rally mainly driven by the artificial intelligence investment boom and the Trump administration's rollback of some tariffs.

Ohsung Kwon, Chief Equity Strategist at Wells Fargo, predicts that if the tariffs are overturned, S&P 500 constituent companies’ EBIT in 2026 could rise about 2.4% from last year's level. However, analysts also point out that even if the court rules the tariffs illegal, the White House may invoke other legal authorities to reimpose similar trade restrictions, meaning policy uncertainty will persist over the long term.

Market consensus is that the short-term reaction path is relatively clear: Removing tariffs will ease cost pressures on consumers and improve corporate profitability, supporting the stock market; yet at the same time, this will weaken an important government revenue source and amplify concerns over the federal deficit—negative for the bond market.

Stock market beneficiaries show clear differentiation

If the Supreme Court rules to abolish the current comprehensive tariffs, the impact on different industries will be markedly differentiated. Companies dependent on imported goods or global supply chains will directly benefit, while domestic producers previously supported by trade protection policies may lag behind.

Specifically, the consumer goods sector (such as apparel, toys, and home goods), which heavily depends on overseas imports and faces high tariff rates, will be the clearest winner, with significant relief for cost pressures and profit uncertainty. Industrial manufacturing and transportation sectors are also expected to benefit from tariff refunds and potential economic stimulus effects. In finance, large banks may benefit from a boost to overall consumer confidence, while more volatile subsectors like fintech could see sharp swings in market sentiment.

Conversely, raw materials, commodities, and some inward-focused manufacturing may lag due to the loss of price protection. Market analysts note that even if tariffs are lifted, the long-term structural impact will depend on whether companies can turn cost savings into actual profit, and on whether the White House shifts to other policy tools to maintain trade barriers.

US Treasury faces fiscal deficit concerns

Bond traders are preparing for possible market volatility, though the general expectation is that the impact will be short-lived. U.S. Treasuries posted returns over 6% so far in 2025, the best annual performance since 2020, mainly due to bets on ongoing Fed rate cuts. However, if current tariffs are removed, the government stands to lose a key revenue stream, potentially reigniting concerns about the federal budget deficit.

J.P. Morgan strategists point out that eliminating tariffs risks “reigniting fiscal worries, lifting long-term yields, and steepening the yield curve,” but they also assess that since the Trump administration may seek to restore most tariffs through other legal means, the overall impact “should be rather limited.”

Morgan Stanley’s team meanwhile highlights that investors should watch the timing and scale of potential tariff refunds to importers, as this would directly impact Treasury issuance needs. They believe that since the market has already anticipated and partly digested this decision, the initial bond market sell-off may be brief, while “second-order and more lasting reactions may be investors ‘buying on the facts’ and pushing yields lower again.”

It is also noteworthy that if tariff removal provides additional economic stimulus, it could complicate the Fed’s rate-cutting path and further intensify fiscal deficit pressure. U.S. Treasury yields have already retreated from the mid-2025 highs, and the market is searching for a new balance between economic growth, policy trajectory, and fiscal sustainability.

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