Wall Street may be fixated on the Federal Reserve’s final interest rate decision of 2025, but another storm is brewing in Washington—one with potentially greater consequences. The U.S. Supreme Court is preparing to rule on the legality of the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs. The decision could reshape fiscal policy, unsettle the $30 trillion Treasury market, and redefine investor sentiment heading into 2026.
A $140 Billion Fiscal Black Hole
At stake is whether the administration overstepped its emergency powers. According to Oxford Economics’ Bernard Yaros, IEEPA underpins three-quarters of tariff revenue growth for fiscal years 2024–2025. If the Court rules against Trump, the government may be forced to refund $140 billion to importers.
Bond traders are already nervous. The yield on the 10-year Treasury has climbed to 4.185%, its highest since September. George Catrambone of DWS warned that an unfavorable ruling could trigger a surge in yields as the Treasury scrambles to plug the fiscal gap by issuing more debt. In a deficit-heavy environment, oversupply fears could hammer bond prices.
Corporate Counterattack: Costco Leads the Charge
The legal battle is not confined to Washington. U.S. corporations are joining the fray. Earlier this month, Costco filed suit demanding tariff refunds if the ruling goes against the government. Analysts expect Walmart and Target to follow, creating a wave of claims that could overwhelm fiscal planning.
Yet refunds may not be straightforward. TD Securities strategist Gennadiy Goldberg noted that repayments could be processed through future import deductions rather than direct cash, easing immediate Treasury pressure but injecting uncertainty—something markets dislike.
Prediction Markets: Odds Against Trump
Investors are hedging for a Trump loss. On prediction platform Polymarket, odds of the Supreme Court upholding the tariffs stand at just 25%. Barbara Reinhard of Voya Investment Management warned that such pessimism, combined with the potential impact of refunds, could drive volatility in long-term yields. Rising financing costs would ripple into the housing market, disappointing households hoping for relief from Fed rate cuts.
Trump’s "Plan B"
Even if the Court strikes down IEEPA tariffs, observers say the administration has backup options. The White House could invoke Section 232 of the Trade Expansion Act of 1962 (national security) or Section 301 of the Trade Act of 1974 (unfair trade practices) to repackage tariffs. Goldberg argues this determination to preserve revenue could paradoxically reassure bond markets—at least fiscal inflows would not vanish entirely.
Investor Outlook for 2026
The ruling’s timing and outcome will set the tone for the first half of 2026. If delayed until early next year, or if alternative tariff mechanisms are introduced quickly, panic may be tempered by other positives: Trump’s tax cuts, falling oil prices, and Fed easing expectations. Reinhard believes these factors could still support equities, even amid bond market turbulence.
Still, the risks are clear. A ruling against Trump could push Treasury yields above 4.3%, pressuring high-valuation tech stocks and tightening financial conditions. Longer term, however, it might force Washington to confront fiscal discipline, a move some investors see as overdue.
The Bigger Picture
This case highlights the intersection of law, politics, and markets. For traders, the Fed’s December cut is already priced in. The real drama lies in whether the Supreme Court forces a fiscal reckoning.
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Short-term risk: Tariff refunds drain reserves, bond issuance spikes, yields surge.
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Medium-term uncertainty: Corporations pursue refunds, Treasury manages repayment complexity.
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Long-term potential: Fiscal discipline enforced, alternative tariff mechanisms deployed, markets recalibrate.
Conclusion: Watch the 10-Year Yield
As Wall Street braces for Powell’s press conference, the Supreme Court ruling looms as the true market mover. A $140 billion refund could ignite a taper tantrum, but it may also push policymakers toward fiscal responsibility.
For investors, the most reliable compass remains the 10-year Treasury yield. Whether it stabilizes or surges will reveal how markets digest this historic legal showdown—and whether 2026 begins with optimism or turbulence.