Could Supreme Court Tariff Decision Trigger a Market Crash? Why the S&P 500 Faces Real Risk

The Legal Showdown That Could Shake Wall Street

When President Trump imposed tariffs under the International Emergency Economic Powers Act (IEEPA) in 2024, few anticipated the legal battle that would follow. Now, with the Supreme Court likely to rule within weeks on whether the president even has the authority to levy these duties, investors face genuine uncertainty about market stability.

The numbers tell a stark story: average tariff rates have climbed to 16.8% from just 2.5% a year ago—the highest level in 90 years and the fastest increase on record. The $90 billion collected under IEEPA authority in fiscal 2025 looms as a potential liability if the Court rules these levies unconstitutional.

What’s Actually Happened Since Tariffs Kicked In

The Trump administration has framed tariffs as economic policy that would strengthen labor and national security. The reality paints a different picture. Since April 2025, when baseline tariffs took effect:

Labor Market Deterioration:

• Hiring has dropped to its slowest pace in over a decade (pandemic years excluded)
• Unemployment climbed to 4.4% by October, the highest in four years
• Manufacturing activity contracted for nine consecutive months

Consumer Impact:

• The University of Michigan’s Index of Consumer Sentiment averaged 57.6 in 2025—the lowest annual average in history
• Inflation accelerated every month since tariffs began

These aren’t abstract statistics. Consumer spending represents roughly two-thirds of GDP, making sentiment shifts critical to market performance. When Americans feel uncertain about jobs and prices, they spend less—and stocks respond accordingly.

The S&P 500’s Resilience (So Far)

Despite this economic headwind, the S&P 500 has advanced 17% in 2025. This disconnect between economic weakness and equity strength raises questions: Are investors overlooking emerging risks, or are they betting the Supreme Court will resolve the legal uncertainty?

The market’s current level may reflect a built-in assumption that tariffs—or at least the questionable IEEPA-based ones—face elimination. A ruling affirming Trump’s authority could validate current prices. But a Supreme Court rejection would upend that calculus.

Why Markets Could Actually Crash

Here’s where the mechanics matter more than political rhetoric. President Trump has warned of a “Great Depression” if the Court rules against him, but the real market risk operates differently.

The Repayment Problem: If the Supreme Court declares IEEPA tariffs illegal, companies including Costco Wholesale and others have already filed lawsuits demanding reimbursement of taxes paid. The government must repay approximately $90 billion it didn’t budget for. That money has to come from somewhere.

The Treasury Bond Consequence: To cover this unexpected expense, the federal government would issue additional Treasury bonds. But bond investors already worried about ballooning federal debt—ironically, a concern tariffs were meant to address—would demand higher yields to compensate for increased risk.

Higher Treasury yields make bonds more attractive relative to equities. When safe government debt offers better returns, capital flows away from stocks. The S&P 500 could decline sharply in this scenario, not because of depression-like conditions, but because of shifting capital allocation and rising discount rates applied to future corporate earnings.

The Disconnect Between Rhetoric and Economics

Treasury Secretary Scott Bessent recently claimed tariffs aren’t actually “taxes,” a position contradicted by standard economic definitions and dictionaries alike. More tellingly, Bessent characterized a Supreme Court rejection as a “loss for the American people”—despite data showing tariffs have measurably harmed employment, manufacturing, and consumer confidence.

The administration’s views on tariff benefits have become increasingly divorced from economic reality. If the Court agrees with prior rulings from the Court of International Trade and the Appeals Court—both finding IEEPA tariffs exceeded presidential authority—it would likely improve economic conditions, not worsen them.

What Happens Next

The Supreme Court’s decision, expected in coming weeks, creates a binary outcome for markets:

Ruling Against Tariffs: Economic conditions likely improve (more hiring, consumer confidence rebounds), but immediate market shock could occur due to repayment borrowing and rising yields.

Ruling For Trump: Legal uncertainty evaporates, but underlying economic weakness from continued tariffs persists—potentially limiting upside.

Neither scenario guarantees a smooth outcome for equity investors in the near term.

The Long View for Your Portfolio

Amid uncertainty, remember what history teaches: The S&P 500 has delivered 10.4% annualized returns over the past three decades. Temporary market dislocations from political or legal decisions typically resolve within weeks or months, while long-term compounding persists through cycles.

Supreme Court decisions matter, tariff policy matters, and yes, market crashes can happen. But they don’t derail long-term wealth building for investors who maintain discipline and focus on fundamentals rather than headlines.

The coming Supreme Court ruling will move markets—but it shouldn’t move your investment strategy.