UBS: If Trump's tariffs are overturned, the Federal Reserve may have the opportunity to cut interest rates as U.S. fiscal pressure mounts

UBS Group analysts pointed out that if the U.S. Supreme Court rules that Trump's tariff policy is illegal, it is expected to force the U.S. government to refund about $140 billion in taxes to importers, equivalent to 7.9% of the estimated federal budget deficit for fiscal year 2025. Once the U.S. government loses the case, the massive tax refunds will immediately trigger a fiscal shock, and may lead to the formation of a structurally low-tariff trade environment. If trade partners do not retaliate, this environment will ultimately benefit the U.S. economy and stock market. UBS estimates that the government is likely to use legal tools such as Section 201 and Section 301 of the Trade Act of 1974 to rebuild tariff barriers, but this process will take several quarters and lead to a decrease in trade policy flexibility.

Although refunds will bring unexpected windfalls to import businesses, the impact on the overall market may be limited since tariff costs have not significantly lowered the earnings expectations of the S&P 500 index. UBS believes that the ruling may ultimately lower the overall effective tariff rate, enhance household purchasing power, alleviate inflationary pressures, and provide the Federal Reserve with more room for easing interest rates. As long as trade partners avoid escalating retaliatory measures, this will generally be welcomed by stock market investors.