Market Implications Of Tariff Litigation And AI Spending
Despite what could be a lengthy legal battle, tariffs are unlikely to be removed completely. The ... More sectoral tariffs were not challenged and President Trump added additional steel tariffs on Friday. The tariff dispute does have some crucial implications for future trade deals and the tax bill.
US economic data releases, which generally raised estimates of second-quarter economic growth, combined with strong earnings from Nvidia (NVDA), helped send stocks higher for the week. Additionally, improvement in consumer confidence helped raise optimism that the tariff overhang doesn't need to sink the economy. A portion of the tariffs implemented by the Trump administration was briefly overturned, though it was reinstated pending appeal.
After the rally last week, the S&P 500 sits only 3.8% below its mid-February high. The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), has fared worse, and the group is 5.5% below its mid-December summit despite outperforming last week.
Market Performance
The betting odds of a recession in 2025 have continued to decline. This improvement aligns with the supportive economic data released last week, which increased the estimates of US second-quarter GDP growth. Furthermore, the Conference Board's survey of consumer confidence rose after plummeting in the wake of President Trump's tariff announcements on Liberation Day.
Betting Odds Of US Recession In 2025
Notably, stocks hit their April low when betting odds of recession were at their highest. As one should expect, the S&P 500 index has risen as the odds of a recession have declined.
Stocks & Recession Odds
Nvidia did not disappoint investors with better-than-expected quarterly earnings and robust guidance for second-quarter revenue growth of 50% year-over-year. Some worries that the spending on artificial intelligence (AI) infrastructure had weighed on the mega-cap technology companies, as represented by the Magnificent 7. In early April, the group was 30% below their mid-December peak. Most of this decline has reversed due to lower odds of recession. Additionally, the first-quarter earnings season provided evidence of both continued spending on AI infrastructure and, more importantly, proof that companies were successfully monetizing these AI investments into tangible earnings growth.
Magnificent 7: Q1 Estimated Earnings Growth
Last week, the Court of International Trade (CIT) struck down the majority of the tariffs implemented by the Trump administration. The sectoral tariffs, for example, those on autos and steel, were not impacted by this ruling. The tariffs removed include the 10% universal tariff, the reciprocal tariffs, and the specific tariffs targeting China, Canada, and Mexico. According to Strategas, this would remove about $220 billion in tariffs, leaving just $40 billion of those implemented since the start of the year.
Within less than 24 hours after the ruling, the US Court of Appeals for the Federal Circuit granted a stay. Therefore, the tariffs will remain in place, and the US will not yet need to refund the tariff revenue collected to date.
This litigation could be a lengthy process, but even if the tariffs are struck down at the end of the litigation, President Trump has the legal authority to reimpose tariffs via alternative methods. However, these methods come with some additional limitations. According to Strategas, Sections 338 and 122 of the Tariff Act of 1930 can be utilized quickly to reinstate many of the tariffs that are currently at risk. Section 338 allows for tariffs of up to 50% that take effect 30 days after announcement, with no time limit on their duration. Section 122 gives the president the authority to impose tariffs of up to 15% with immediate effect, but these tariffs can only remain in place for 150 days without congressional approval. Furthermore, Section 301 of the Trade Act of 1974 permits the imposition of tariffs following an investigation by the United States Trade Representative (USTR).
It is doubtful that tariffs will go away unless President Trump decides that they are, but the utilization of other methods is more laborious, time-consuming, and comes with more limitations.
Even though tariffs seem likely to remain a part of the investment landscape, regardless of the outcome of the litigation, there are some crucial implications of the additional uncertainty.
On the margin, the possibility that the courts could remove the tariffs leaves the Trump administration with less leverage to negotiate trade deals with other countries. Countries may choose to stall and see what happens with the litigation. The G-7 meeting in June could provide some insight into whether any new deals are forthcoming.
The tax bill passed by the US House of Representatives was debt-neutral if the revenue from the tariffs was included in the scoring. The risk to the tariff revenue may further complicate the Senate's deliberations in passing a version of the bill.
Markets will remain on the tariffs, with markets watching for any changes in US policy and the progress of the legal challenge. Further, retaliation from or trade deals with other countries will be notable.
The economic calendar has the critical monthly jobs report on Friday. Expectations are for nonfarm payroll job growth to slow to 125,000 from 177,000 in April. The unemployment rate is expected to remain steady at 4.2%. These forecasts are consistent with the weekly initial filings for unemployment benefits, which remain low and don't indicate a collapse in the labor market.
Initial Jobless Claims
Ongoing claims for unemployment benefits are rising, indicating that it is taking longer for those losing their jobs to find new employment. The labor market is showing signs of bending but not yet breaking.
Continuing Claims
Regardless of the outcome of the tariff litigation, tariffs are unlikely to be banished completely. To that point, President Trump imposed a 50% steel tariff late last Friday, and these sectoral tariffs are not part of the current legal challenge.
Recent hard economic data, along with some soft data, such as consumer confidence, have raised optimism that US economic growth remains resilient. Furthermore, technology spending related to artificial intelligence continues, with the sector producing robust earnings growth. This week's jobs report will be another key indicator of the US economy's health.
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