Supreme Court Ruling on Tariffs: Depression Risk or Treasury Shock?

President Trump has issued a stark warning regarding the pending Supreme Court decision on his signature trade policies, claiming an adverse ruling would trigger an "economic disaster" comparable to the Great Depression. However, the mechanism by which the stock market might suffer is likely far more technical—and arguably more immediate—than the historical collapse of 1929. While the S&P 500 has managed a robust 17% gain in 2025, underlying economic data suggests that the aggressive use of the International Emergency Economic Powers Act (IEEPA) to justify tariffs is creating significant friction within the US economy.

The administration’s stance on trade has largely decoupled from observable economic indicators. Treasury Secretary Scott Bessent recently stated, "I don't believe tariffs are a tax," a view that conflicts with standard economic definitions and the reality facing US importers. Since the baseline tariff implementation in April, the average tax rate on US imports has surged from 2.5% to 16.8%—a level not seen in nine decades.

Contrary to the administration's claims that these measures are "good for labour," the macroeconomic fallout has been tangible. Hiring rates have slowed to their lowest pace in over ten years (excluding the pandemic era), and unemployment hit 4.4% in October. Furthermore, the manufacturing sector has contracted for nine consecutive months, and consumer sentiment has plummeted to historic lows. While the administration argues that judicial rejection of these tariffs would harm the American people, the data suggests that the current trade regime is already fueling inflation and dampening growth.

The core of the legal dispute lies in the executive branch’s authority. The US Constitution explicitly grants Congress the power to levy taxes. To bypass this, the Trump administration utilised the IEEPA, a 1977 statute that does not explicitly mention "tariffs." Consequently, the Court of International Trade ruled the tariffs illegal in May, a decision upheld by the Court of Appeals in August.

During arguments in November, Supreme Court justices reportedly expressed scepticism regarding the legality of using emergency powers to rewrite trade tax law. A final decision is expected shortly. If the Court strikes down the tariffs, it would ostensibly be a victory for free trade and consumer sentiment, potentially reversing the inflationary pressure seen throughout 2025. However, the immediate financial mechanics of such a ruling present a paradox for equity markets.

The true risk to the S&P 500 is not necessarily a depression, but a sudden shock to the Treasury market. Revenue collected under the disputed IEEPA statute totalled nearly $90 billion in fiscal year 2025. If the Supreme Court rules that the President exceeded his authority, the federal government may be legally obligated to repay these funds to importers. Major corporations, including Costco Wholesale, have already filed claims to secure reimbursement.

This creates an unbudgeted liability. To finance $90 billion in refunds, the Treasury would be forced to issue additional bonds. In a market already wary of federal debt levels, this surge in supply would likely push bond yields higher to attract buyers. Rising yields typically exert downward pressure on equities, as risk-free Treasury bonds become more attractive relative to stocks. Therefore, while the long-term removal of tariffs might aid the economy, the short-term liquidity crunch and spike in yields could indeed trigger a sharp market correction, validating the fears of a downturn, albeit for reasons entirely different from the President’s prediction.