Wall Street is not ready for a change in tariffs
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The Supreme Court will hear arguments Wednesday on whether President Trump's sweeping global tariffs are legal.
Why it matters: Once viewed as the biggest drag on markets for the year, investors have largely accepted the tariffs. They may not be prepared for a potential change to the levies.
What they're saying: "The market expects a benign outcome" though there is "considerable uncertainty on how the Court will rule," according to a research note from Standard Chartered.
- A pause or stop to tariffs could weaken the U.S. dollar, and yields could then rise. Unwinding the tariffs could fuel volatility, the analysts wrote.
- Investors may want to sell out of dollar-denominated assets if they are concerned the lack of tariff revenue could hurt America's ability to chip away at the deficit.
- A ruling that lets sweeping tariffs stay in place would be "friendly to U.S. asset markets short term" as it would lower uncertainty, the bank noted.
Catch up quick: The Supreme Court will determine whether Trump had the authority under the International Emergency Economic Powers Act to enact emergency tariffs.
- If the high court finds his use of that authority illegal, he still has other means of imposing levies, especially at the sector level.
- But sector level tariffs would take time and be done piecemeal, fueling further policy uncertainty for companies and investors.
Threat level: While the news of sweeping tariffs initially sent stocks down nearly 20% in April, the market has recovered and then some, as strategists now worry that losing tariff revenue could be a bigger market risk than the tariffs themselves.
- Standard Chartered notes that changes to current tariff policy "would damage the U.S. fiscal position" given how much revenue has come in, potentially chipping away at the deficit.
- On the flip side, a ruling against sweeping tariffs leaves "a good chance that overall tariff rates would end up lower than those prevailing today, reducing inflation and boosting economic growth," David Kelly, chief global strategist at JPMorgan Asset Management, wrote in a note.
- That could be jet fuel for consumer-facing stocks.
Reality check: Some corners of the market are feeling the tariff punch more.
- Consumer staples is the only sector of the S&P 500 that is in negative territory for the year, which indicates that investors have little faith in companies tied to the spending of lower-income consumers.
- This earnings cycle, some automakers and fast-casual restaurants have cited weaker spending from middle to lower-income consumers.
The bottom line: Wall Street likes certainty. As tariff policy has fallen to the back burner, a surprise Supreme Court ruling could make investors skittish, especially as stocks are already faltering this week.
