Investing.com -- Markets may be overlooking a key legal risk that Macquarie warns could shake the foundations of U.S. trade and fiscal policy, lifting long-term bond yields and put a lid on stock valuations.

“Traders are not paying enough attention to the prospect that the U.S. Supreme Court will interfere in the administration’s tariff agenda,” Macquarie economists said in a recent note. The court is set to begin hearings in early November, with a ruling likely by early 2026.

The Supreme Court is preparing to hear arguments on whether President Trump’s authority to impose tariffs under the International Emergency Economic Powers Act, or IEEP, should be overturned.

If the justices revoke the president’s discretionary tariff powers, Macquarie warns the implications could be far-reaching. The decision “would raise concerns about higher effective deficits, the sustainability of the U.S.’s sovereign debt burden, and the amount of bond issuance over the next 5-10 years,” the economists said. That, in turn, could push yields higher and compress stock market valuations.

The Center for a Responsible Budget estimates that ending IEEPA tariffs and refunding prior collections could strip about $2.3 trillion in revenue from the federal budget between 2025 and 2034.

For currency markets, meanwhile, the dollar is likely to feel the pain. “We suspect that the USD would weaken in that environment, especially as it would raise concerns about debt monetization, a ’captured’ Fed, and financial repression by the Fed to hold back a rise in yields,” the economists added.

Beyond domestic fallout, the legal uncertainty may slow progress in U.S.-China trade talks.

Beijing’s negotiators “may not be willing to make many concessions to the U.S. until a final ruling is issued,” Macquarie says, seeing the court case as a chance to gauge Washington’s future leverage.

As traders continue to focused on near-term positives including soft inflation, further Fed easing, and resilient corporate margins, Macquarie warns that complacency could leave markets blindsided by a policy shock with deep structural consequences.

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