Moving Past Peak Tariffs

Overshadowed by the ongoing selloff in perceived AI-disrupted industries, the legal landscape of U.S. trade policy changed significantly last Friday. In a 6-3 decision, the Supreme Court ruled that the administration cannot use the International Emergency Economic Powers Act (IEEPA) to unilaterally impose tariffs. The court clarified that while the president has broad authority over foreign affairs, the power to levy taxes—including tariffs—resides with Congress. This ruling effectively removes the most flexible tool the current administration has used to date.

To maintain its trade strategy, the administration pivoted to a "two-step" replacement plan. Over the weekend, President Trump invoked Section 122 of the Trade Act of 1974, implementing a 10% global tariff as a temporary bridge. This authority is limited: it lasts only 150 days without congressional approval and is capped at a 15% rate. Longer term, we believe the administration may shift toward more durable, but slower, investigations under Section 232 (national security) and Section 301 (unfair trade).

The Refund Question

A major point of uncertainty is the estimated $175 billion in tariffs collected under the now-invalidated IEEPA authority. While the Court did not provide a specific roadmap for refunds, we anticipate a drawn-out legal process. The administration will likely require importers to navigate burdensome litigation that could span years and disproportionately impact smaller firms with limited legal resources. While some refunds may eventually be issued, we expect the process will likely be costly, slow-moving and far lower than what is owed.

We believe this ruling confirms that we have moved past "peak tariffs" with the new 10% tariff rate representing a “cut” for most countries. While the absolute level and legal justification remain in a state of flux, the alternative legal avenues create a natural ceiling on headline rates, as these tools are either time-limited or require extensive sector-specific reviews.

Fourth Quarter Earnings

Despite ongoing concerns regarding AI disruption, corporate fundamentals remain strong and continue to exceed expectations. Heading into the Q4 earnings season, analysts expected S&P 500 profits to grow 8.3%. Following NVIDIA’s impressive results this week, the S&P 500 is now expected to grow earnings 14.2%, marking the fifth consecutive quarter of double-digit earnings growth for the index. This improvement was broad-based, with ten of the eleven sectors reporting positive earnings surprises. Looking ahead, hyperscalers show no signs of slowing their AI investments; capital expenditure for 2026 is projected to exceed $700 billion. This represents a 63% increase from the year prior, signaling their commitment to artificial intelligence revolution remains steadfast.

Takeaways for the Week

• Last Friday, the Supreme Court struck down the administration’s ability to unilaterally impose tariffs under the IEEPA

• Trade uncertainty has increased but tariff rates are likely past their peak

• The S&P 500 index declined 1% in February driven by fears of AI disruption

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