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The past week ended with a bombshell: the United States Supreme Court ruled that President Donald Trump may not impose tariffs under the International Emergency Economic Powers Act (IEEPA). The authority to levy tariffs is part of Congress's taxing power; the executive branch can only exercise it on the basis of an explicit statutory delegation. Importantly, the ruling is statute-specific, not a broad trade policy decision. Other instruments such as anti-dumping measures remain untouched. However, these are procedurally bound and require review processes spanning several months — making short-term substitution through this route impossible.
Nevertheless, the Trump administration responded immediately: on the very day the ruling was handed down, the President announced a global tariff of 10 percent under Section 122 of the Trade Act of 1974, which he raised to the statutory maximum of 15 percent the following day. However, tariffs under Section 122 are limited to 150 days and require a balance-of-payments crisis. An extension would require Congressional approval — which appears unlikely, both because no balance-of-payments crisis exists and because there is no reliable bipartisan majority for a broadly based tariff regime.
More strategically significant than the immediate consequences is the structural shift: Trump loses the tool of an instantaneous, universally scalable tariff lever based on emergency authority. Going forward, tariffs will again generally need to be implemented on a sector- or country-specific basis, subject to procedural requirements, and with adequate lead time.
In capital markets, the ruling against blanket reciprocal tariffs creates short-term uncertainty, as existing tariff agreements will need to be renegotiated and the scope and timeline of potential tariff refunds remain open. Over the medium and long term, however, the decision is a positive signal for the institutional reliability and rules-based nature of U.S. trade policy: the ability to invoke broadly defined emergency powers is now clearly curtailed. The ruling also confirms the functioning of checks and balances and once again constrains executive discretion more firmly within the bounds of legislatively prescribed instruments. From a market perspective, this makes the trade policy framework more predictable and dependable.
Overall, equity markets remain in a robust uptrend. Solid fundamentals are supporting a broadly constructive investment environment. Global monetary policy is on balance neutral. Recent positive inflation data in both the U.S. and Europe have even increased the probability of further easing steps. At the same time, macroeconomic data remain stable — in both the United States and Germany, early signs of an industrial recovery are emerging. While U.S. industry is being driven primarily by AI investment, Germany is seeing improvement mainly from rising defense orders. The trend in corporate earnings also remains clearly positive.
Beneath the surface, however, markets are showing significant divergence in sector performance. Market structure is as fractured as it has rarely been in recent years. The biggest underperformer is the technology sector, which is displaying clear relative weakness. Heavy AI investment is weighing on free cash flow and leading to a noticeable decline in share buybacks. From an investor's perspective, secure returns are increasingly being replaced by AI investments with uncertain profitability — the resulting nervousness is understandable. Pronounced concerns about disruption are also weighing on the sector. Software stocks are under pressure as the market prices in the risk that generative AI will erode the value-added depth of traditional software providers, calling their long-term earnings power into question. As is often the case, the market is correct in the general direction of this repricing, but in the short term, the magnitude of the price reactions appears exaggerated.
For investors, the key takeaway is this: mega-cycles are not a one-way street. Temporary phases of disillusionment, triggered by concerns over profitability and disruption, are plausible within a structural uptrend and do not initially signal a trend reversal. Over the long term, however, it is reasonable to expect that not all companies and business models will emerge as winners in the AI race. Professional investors must therefore differentiate more carefully, focusing on sustainable cash flow quality, durable competitive advantages, and companies' ability to convert their investments into earnings.
