MW Investors are ready for the Supreme Court to strike down Trump's tariffs. Now it's up to the economy to pick up.
By Vivien Lou Chen
Investors appear increasingly confident around U.S. trade developments. The focus instead has turned to a steady economy.
The Supreme Court's widely anticipated ruling on President Donald Trump's tariffs may land as soon as Feb. 20.
Stock-market investors are less worried about tariff-driven scares than they were nearly a year ago, and this more confident approach toward trade developments is being accompanied by a focus on something else: the strength of the U.S. economy.
Those two ideas track with action in markets over the past nine to 10 months. MarketWatch took a close look at how investors got to this new sense of resolve around Trump's tariff threats after the shock of last April's White House announcement on broad-based tariffs.
Despite continued trade rhetoric from President Trump, the S&P 500 index SPX was trading at record levels on Wednesday, and volatility has plunged to some of the lowest levels in the past five years, as the chart below shows. The S&P 500 briefly hit 7,000 for the first time, while the CBOE Volatility Index VIX - a measure of expectations for near-term stock-market volatility, also known as the VIX - was just under 17 on Wednesday, down from as high as 52 in the days that followed Trump's April 2 "liberation day" tariff announcement.
"Markets have gotten conditioned to the reality that it is often a mistake to take some of these headlines on tariffs literally," said Michael Reynolds, vice president of investment strategy at Philadelphia-based Glenmede, which managed $50.1 billion in assets as of Dec. 31.
"Tariffs have often been used as a negotiating tool and we've ultimately settled at effective tariff rates that are more digestible by the companies that have to pay them," he noted. The average effective U.S. tariff rate on all imports now stands at 17%, according to the Tax Policy Center. That's the highest since the 1930s.
Trump's April 2 announcement - which revealed a sweeping two-tiered package of tariffs of at least 10% on most imports and higher rates for specific countries like China - caused the S&P 500 to nearly drop into a bear market. The index fell by a total of 10.8% over the two days after April 2, and was on the brink of a 20% decline from last February's highs before it rebounded. By May 2, the S&P 500 had recovered all of its post-liberation-day losses.
Fast forward to the end of 2025 and early 2026: On Nov. 5, the prediction market Kalshi showed a collapse in the odds that the Supreme Court would rule in Trump's favor in a case on the legality of the tariffs, with those chances plunging to 21% from 57%. The same day, the S&P 500 squeaked by with a 24.74-point, or almost 0.4%, gain that sent it to 6,796.29, for its best daily performance in a week. Volatility remained low.
Then on Jan. 17, a Saturday, the president threatened to put 10% tariffs on European allies in an effort to obtain Denmark-controlled Greenland. The S&P 500 dropped almost 2.1% when markets reopened three days later after the Martin Luther King Jr. Day holiday. The VIX spiked to a year-to-date high of 20.
Yet it only took one day for the S&P 500 to begin recovering, after Trump said a framework for a deal on Greenland had been reached that would remove the need for new tariffs on Europe. The benchmark index climbed to a record closing high of 6,978.60 on Tuesday while aiming for the 7,000 mark for the first time ever, even after Trump threatened to raise tariffs on South Korea to 25%. Last Saturday, he also said Canada could face a 100% tariff if it reaches a trade deal with China.
Worries over trade developments have faded largely because of a few big reasons. One is the presumption that tariffs are merely a negotiating tool on the way to the Trump administration taking less drastic measures in the end. The other is that the persistent strength of the U.S. economy ultimately matters more than tariff-driven headlines.
"Investors see the economy as having done OK even with current tariffs in place, and are getting more and more comfortable with the economy's ability to digest them," said Luke Tilley, the Philadelphia-based chief economist for Wilmington Trust Investment Advisors. "We expect the Supreme Court will strike down tariffs, which will lead to refunds, but the wild card after that is how the administration reacts."
The Supreme Court's decision may now arrive on Feb. 20 at the earliest, due to a four-week recess the justices are already taking. Until then, many investors and traders are operating under an assumption that the high court will probably rule against Trump, but that the White House should be able to easily find other ways to restore tariffs - though the latter scenario is up for debate.
'Pretty big deal'
The Supreme Court is set to rule on Trump's use of the International Emergency Economic Powers Act (IEEPA) of 1977 to issue sweeping tariffs against major trade partners. Earlier this month, Trump's top trade negotiator, Jamieson Greer, told the New York Times that the administration would "start the next day" to restore tariffs in the event of any adverse ruling.
The administration has the option to use Section 122 of the Trade Act of 1974 in the short term, which would give Trump the authority to impose immediate 150-day tariffs of up to 15% on all trading partners to address large and serious balance-of-payment deficits. The president can then rely on other sections of the same act to give the administration "the same shape and form" of current tariff policies over the long run, according to Glenmede's Reynolds.
Amar Reganti, a Boston-based fixed-income strategist at Hartford Funds who served as deputy director of the Treasury Department's Office of Debt Management from 2011 to 2015, said the vast majority of nonemergency powers which Trump could invoke under U.S. trade law would require his administration "to pull more levers."
Those levers would include the need for studies and public comments, so it would be "much harder" to have permanent broad-based tariffs to the same degree as under IEEPA, Reganti said. There's also a possibility that such use of nonemergency powers might be challenged in court, he added.
Still, "the market has taken comfort in the notion that extreme measures taken by the administration will be walked back," the strategist said. Now, "the market prices each announcement with less volatility than the prior announcement, because it is seen as just opening words."
Joy Wiltermuth and Mike DeStefano contributed.
-Vivien Lou Chen
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 28, 2026 13:33 ET (18:33 GMT)
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