UBS: If Trump's tariffs are overturned, the US Federal Reserve may have the opportunity to lower interest rates amid financial pressure.

UBS Group analysis indicates that if the U.S. Supreme Court rules that Trump's tariff policy is illegal, it is estimated that the U.S. government will be forced to refund approximately $140 billion in taxes to importers, equivalent to 7.9% of the projected federal budget deficit for fiscal year 2025. If the U.S. government loses the lawsuit, the substantial tax refunds will immediately trigger a fiscal shock, and could potentially lead to the formation of a structurally low-tariff trading environment. If trading 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 decreased flexibility in trade policy. While the refunds will bring unexpected windfall for importing companies, the impact on the overall market may be limited as tariff costs have not significantly lowered profit expectations for the S&P 500 index. UBS believes that the ruling may ultimately reduce the overall effective tariff rate, increase household purchasing power, alleviate inflation pressure, and provide the Federal Reserve with more room to cut interest rates. As long as trading partners avoid escalating retaliatory measures, this will generally be welcomed by stock market investors.