Jobs day takes a back seat as the Supreme Court weighs the legality of Trump-era tariffs and the market implications are massive.
KEY TAKEAWAYS
Jobs day matters but the Supreme Court ruling may matter more
Tariffs generated roughly $200 billion in revenue last year
Prediction markets expect tariffs to be ruled unlawful
Removing tariffs would lift margins but widen the deficit
Higher deficits could pressure Treasury yields
MY HOT TAKES
Markets often fixate on the wrong data release
Tariffs were always more about revenue than reshoring
Deficits ultimately assert themselves through bond markets
Equity gains and yield pressure can coexist uneasily
The tariff debate is far from resolved regardless of today’s ruling
You can quote me: “Deficits don’t care who’s right--they care who’s paying.”
Liberated. It’s jobs day! For the first Friday of the month in a long time, we will actually get the all-important tallies from the Bureau of Labor Statistics. All eyes will be on the tape this morning–including those of the Fed’s FOMC policymakers. Will it move markets? Likely. Will it dominate AM financial TV? For sure. If the numbers come in reasonably close to estimates, will it impact your portfolio's return potential for 2026? Really, probably not! How was that for an ambiguous but rigorous-sounding answer?
Something far more important is dropping on the tape this morning and it has nothing to do with the Fed–shocker. No. It has to do with the Supreme Court! According to Kalshi and Polymarket, there is a good chance that today, the Supreme Court will not rule in favor of the legality of the Trump Administration’s tariffs. Go on, re-read that.
In the now closely-watched prediction markets, gamblers–oh sorry, investors ( 😂 ) think that there is roughly a 26% chance that the Supreme Court rules in favor of the President’s tariffs. On Wall Street, we would call that not likely. Chances were higher earlier (see chart that follows) but today, this morning–the morning that the Supreme Court has announced that it will…er, announce its decision on the question of the legality of tariffs, the fairly fluid prediction markets have their money on a “no.”
These predictions happened to be in line with what most financial insiders are expecting as well. In case you missed all this, let’s go over it and contemplate the implications of this morning’s ruling because this WILL affect your portfolio’s performance in 2026.
The case, entitled Learning Resources, Inc. v. Trump, centers on whether the International Emergency Economic Powers Act (IEEPA) of 1977 grants the executive branch the authority to impose broad import duties. The Trump administration argues that the law's power to "regulate" commerce during a declared national emergency includes the right to levy tariffs, while challengers contend this authority is reserved exclusively for Congress under Article I of the Constitution. Lower federal courts previously ruled against the administration, finding that the statute's not mentioning "tariffs" or "duties" prevents its use as a general revenue-raising or trade-rebalancing tool.
That’s about as legal as I will ever get in this blogpost/newsletter, but I wanted you to know the basis for what might hit the tape later this morning. In a nutshell, the last stop on the legal train could rule that the President’s tariffs are illegal. Let’s try to understand what the impact of that ruling would be.
What’s immediately at stake? Let’s start with the numbers. I have tried to find a good number from a reliable government source to cut through the clutter of the many official-sounding numbers bouncing around the internet, and surprisingly, I was only able to find bits and pieces. This leaves us with… something around $200 billion. Let’s go with that and move on. That is the amount of levies collected last year.
Turning back the clock to last February and March as the administration was formulating its tariff strategy and messaging, it seemed that the goal for the tariffs was to bring manufacturing back to the US and to “even the playing field.” Many of the US’s trade partners actually charge tariffs on US exports despite enjoying very lucrative trade with the US. Economists–including this one 😉 were quick to point out that tariffs were effectively a tax levied on and collected from US companies. Yes, tariffs have an upfront negative impact on US companies. US companies actually pay the tax to US Customs. That was negative for stocks for such an obvious reason that I won’t cover it.
The administration was determined to move forward, but it had other fish to fry. There were rapidly increasing fears of a rising deficit. Those fears started to bounce around the markets in 2024 long before the President won the election and moved into the White House. Those fears expressed themselves in the persistently high yields of longer maturity Treasuries despite the Fed’s late-’24 pivot and rate cuts. Higher deficit means more debt (you ‘gotta pay with something) and more debt supply pushes prices lower (econ 101). In bond math, lower prices mean higher yield. It’s just that simple. That my friends is the reason why mortgage rates–while lower–are not even lower. The deficit bloat fears are related to the decrease in tax revenue resulting from what ultimately became the One Big Beautiful Bill Act.
DOGE was birthed to cut spending to minimize the blow. Some spending was cut, but not nearly enough to cover the increases. BUT wait…isn’t the US collecting massive amounts of new tax revenue related to the tariffs? Yes, indeed, as mentioned above. Ahh, time to switch messaging. Foreign trade levies would offset some of the deficit gains. Now, we know that “foreign trade levies” are paid by US importers. That aside, in 2025 the Government actually collected an additional $200 billion or so in tax revenue to offset the deficit. That is the current messaging, and it is mathematically correct. It is simply another tax going into the Treasury’s coffers.
That brings us back to the Supreme Court this morning. If it rules against the President, what happens to that $200 billion? Will the Treasury Department be required to send checks back to taxed companies with a memo that reads “sorry, never mind.” Will the Government be required to pay interest, perhaps even a penalty? You try not paying taxes to the IRS and you better believe you will pay interest and penalties. Just saying. So, there is a chance that this “windfall” of tax revenue will simply disappear.
That won’t be the immediate focus of the markets. More likely, stocks would rally if the tariffs were deemed illegal. That means that affected companies will suddenly find themselves more profitable. How much more? Enough to make it meaningful. Ok, to be a bit more precise, the Statutory Average Rate today is around 27%, and if that were struck down, it would likely revert to 2.5%, which is what it was in 2024. That’s almost 25%! But to be clear, not all companies pay tariffs, and some which you think do–might not, actually. For example all those nasty sounding tariffs on autos are not so bad or even exempted once you read the fine print. But still, someone has paid up to $200 billion, which will not have to be paid going forward. Stocks like that.
Now, back to the deficit. With the current narrative around “tariffs are good for the deficit,” some problems arise. If the US can’t collect tariffs, well, the deficit will go up. That is not guessing, it’s real math. The Government takes in revenues and has expenses just like you and me. The difference is that the Government can just sell bonds to cover any overages. Selling more bonds? Yep–you guessed it–Treasuries will likely pick up some pressure if the tariffs are ruled to be unlawful.
If Treasury yields rise, immediate pressure should also be found in growth stocks which are highly sensitive to interest rates–for no reason other than finance math. So, will that finance math cause any rally to be short-lived? Maybe. There is no question that higher yields will add weight to the equity markets. Just how much remains to be seen.
Now, today’s ruling is not a simple binary answer. Some tariffs may be allowed, while others may be deemed unlawful. Additionally, it is not clear whether or not the $200 billion would need to be repaid and under what terms. Any repayment would be a windfall for taxed companies. Scott Bessent will certainly have his hands full having to find the funds to repay. Additionally, like always, the administration is likely to have “Plan B.” The administration is likely to pivot to alternative legal authorities like Sections 232 or 301.
By the time you read this or catch my videos on this, the Court is likely to have released its ruling. The markets are likely to react to this along with the jobs numbers. This is a very complex matter and a ruling in either direction will have immediate effects and longer-run effects in the months and quarters ahead. Stay tuned on this–the issue of Tariffs is not likely to go away this morning.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday with the majority of stocks rallying, helped by the President’s announcing a massive surge in defense spending. Tech was held back as investors took profits on recent gains. Crude prices gained and gold inched higher.
NEXT UP
Change in Nonfarm Payrolls (December) may have picked up pace to 75k from 69k.
Unemployment rate (December) probably slipped to 4.5% from 4.7%.
Housing Starts (October) are expected to have gained by 1.8%.
University of Michigan Sentiment (January) may have improved to 53.5 from 52.9.
Next week: earnings season kicks off and we get inflation numbers from BLS, Retail Sales, and more housing numbers. Come back Monday morning to download economics and earnings calendars so you can dominate the markets like a boss.