Do you view the proverbial glass of water as half-full or half-empty? The answer could determine how you think about the stock market’s performance this year.
If you’re an optimist, you’ll probably focus on the resurgence of the S&P 500 (^GSPC -0.67%) in recent weeks. On the other hand, pessimists will likely point out that the S&P 500 appears to be losing momentum, was firmly in correction territory not long ago, and is still down year to date.
I’m more interested in where stocks will be than where they’ve been. And I predict the stock market will soar before the end of 2025. But this big rally could be at the cost of President Trump’s tariffs.
Image source: Getty Images.
A clear correlation
Look at the following chart that shows the S&P 500’s performance so far in 2025. The index started the year on a relatively positive note. It started to decline in late February. In early April, the S&P 500 crashed. However, it soon rebounded.
What caused this volatility? Unless you haven’t paid attention to the news over the past few months, you can probably immediately answer this question. The S&P 500’s swings have been caused by President Trump’s tariffs.
Each S&P 500 decline this year occurred when investors were concerned about tariffs. The steep sell-off in April came after the president announced his “Liberation Day” tariffs on nearly every country. But when investors’ tariff worries waned, the S&P 500 rose. For example, the strong recent rebound was sparked by President Trump’s delaying his steep “reciprocal” tariffs by 90 days.
There’s a clear correlation between tariffs and the S&P 500’s performance. Tariffs on, S&P 500 down. Tariffs off, S&P 500 up. My prediction that the stock market will soar before the end of 2025 hinges on my view that the tariff threat will be taken off the table.
The ball’s in the courts’ court
How could tariffs become a non-issue for stocks with a self-proclaimed “Tariff Man” in the White House? I think the answer could be embedded in the U.S. Constitution’s system of checks and balances. The judicial branch could limit what the executive branch does.
At least seven lawsuits have been filed challenging Trump’s tariffs. Some were initiated by businesses and legal advocacy groups. Others were filed by states, including 12 states that joined forces: Arizona, Colorado, Connecticut, Delaware, Illinois, Maine, Minnesota, Nevada, New Mexico, New York, Oregon, and Vermont. Members of the Blackfeet Nation have also sued the Trump administration over tariffs.
Granted, the White House has already won a small victory. Last week, U.S. Judge T. Kent Wetherell II, a Trump appointee, said that the president can unilaterally impose tariffs. He based his decision on a precedent set by a federal customs court in 1971 that allowed President Nixon to briefly levy 10% tariffs on many imports. However, Wetherell transferred the case to the U.S. Court of International Trade in New York, so his take won’t ultimately matter.
This federal trade court recently heard arguments in another tariff lawsuit, V.O.S. Selections v. Trump. The three-judge panel seemed skeptical about the Trump administration’s stance that federal courts shouldn’t be able to review the legality of the president’s tariffs.
The major questions
One question before the courts is whether the International Emergency Economic Powers Act of 1977 (IEEPA), the federal statute the Trump administration used to justify imposing tariffs, allows the president to levy tariffs at all. The IEEPA doesn’t specifically mention tariffs.
Another challenge relates to Trump’s declaring a national emergency, as required by the IEEPA, based on trade deficits. The IEEPA states that the national emergency declaration must result from an “unusual and extraordinary threat.” Oregon Senior Assistant Attorney General Brian Marshall noted before the U.S. Court of International Trade last week that the U.S. has had trade deficits with the rest of the world for the past 49 years. He argued, “This is not an unusual problem.”
The legal doctrine known as “nondelegation” presents another key hurdle for the White House. This nondelegation doctrine says that Congress can’t delegate its powers to other entities without “an intelligent principle” by which the entity to which power is delegated can follow that limits its authority. The U.S. Constitution only permits Congress to levy taxes and tariffs.
Perhaps the most significant question related to the administration’s tariffs, though, is aptly named the “major questions doctrine.” Under this doctrine, Congress must “speak clearly” when it delegates authority to the executive branch in areas of “vast economic and political significance.”
The IEEPA doesn’t clearly give the president the power to impose tariffs. The tariffs imposed by the Trump administration definitely have “vast economic and political significance.” I suspect that this could be the hill that the president’s tariffs die on when the U.S. Supreme Court inevitably weighs in on the issue.
How confident am I with my prediction?
I’ll readily admit that I’m not 100% confident in my prediction that the stock market will soar before the end of 2025. I’m not a lawyer, and I’m certainly not a Nostradamus.
However, I’m reasonably confident in my prediction. The legal arguments against the administration’s tariffs make sense to me. If the courts block Trump’s tariffs, the stock market will soar — maybe even enough to make that proverbial glass of water overflow.
