Financial analysts at BCA Research anticipate that a potential Supreme Court decision against the legality of the extensive tariffs implemented under former President Donald Trump's administration may lead to a lowered likelihood of a U.S. recession. This prediction comes as markets await the court's ruling on whether the Trump administration possessed the authority to apply these tariffs using a national emergency powers statute enacted in 1977.
During a hearing last year, some justices expressed notable doubts regarding the government's rationale for imposing tariffs under this law. Consequently, investors are generally expecting the court to invalidate the tariffs. Currently, betting platform Polymarket indicates a mere 31% chance that the Supreme Court will uphold the Trump administration's position.
Tariffs have been a frequent instrument of enforcement in Trump's international dealings, including recent threats to impose additional tariffs on several European NATO countries contingent upon U.S. acquisition rights of Greenland.
Should the Supreme Court decisively restrict the administration's capacity to apply tariffs in this manner, BCA strategists Peter Berezin and Melanie Kermadjian estimate the probability of a U.S. recession over the next year to fall from 50% to 40%. Concurrently, they foresee an increased chance of the economy overheating rising from 20% to 25%, alongside a rise in the prospects for a "soft landing" scenario—from 30% to 35%—where tighter monetary policies effectively manage high inflation without triggering a downturn.
The analysts highlight that even with a reduced 40% recession risk, this rate remains substantially higher than the baseline unconditional probability of 12%. This elevated risk is justified by ongoing concerns surrounding a fragile labor market, stretched consumer finances particularly among low-to-middle-income groups, and persistent weaknesses in the housing sector.
They also projected that nullifying Trump's tariffs would raise their scenario-weighted year-end 2026 target price for the S&P 500 index from 6,200 to 6,375. The S&P 500 settled at 6,913.35 recently, reflecting ongoing market optimism despite the uncertainty.
Formerly, Trump introduced a sequence of increased import taxes during a widely covered "Liberation Day" event, before subsequently moderating this approach through bilateral and multilateral trade agreements. Despite these adjustments, the effective U.S. tariff rate remains at its highest point since the mid-1930s.
While these levies have bolstered federal revenues and narrowed the trade deficit, economists argue they also contributed to a divide in economic performance, with gains heavily favoring higher-income individuals and large corporations. In contrast, lower-income households face escalating living expenses and a cooling employment market, raising affordability issues ahead of significant midterm elections.