[Thorough Simulation] What if the Supreme Court says 'NO' to tariffs? 'Soaring sectors' and 'devastated sectors' at the end of protectionism

1) Introduction: What you will learn in this article

In this article, we simulate a world where a scenario close to a 'black swan'—which the market has currently almost entirely ignored—becomes reality: namely, **'the restriction of presidential tariff authority by the U.S. Supreme Court (Tariff NO).'** Many investors have built their portfolios based on the premise of 'Trump trades' or the 'maintenance of protectionism by the Biden administration,' but if the legal basis (such as Section 232 of the Trade Expansion Act or the International Emergency Economic Powers Act) is overturned by the judiciary, the market's premises will collapse from the foundation.

Conclusion of this article (Spoiler):

• Sharp decline in inflation: Due to the drop in import prices, immediate downward pressure will be placed on the CPI (Consumer Price Index), and the Fed's rate-cutting pace will accelerate beyond market expectations (3-4 times in 2025).

• Reversal of sector rotation: The 'domestic manufacturing return stocks (steel/old economy)' that have been favored until now will plummet, while 'import-dependent retail and consumer discretionary' stocks will soar.

• Turning point for the dollar-yen: With the narrowing of interest rate differentials and risk-on dollar selling combined, pressure for a stronger yen and weaker dollar will intensify, which will be a headwind for Japanese export stocks.

By keeping this extreme scenario in the back of your mind, you can see the necessity of hedging against your current 'protectionism-only' positions.

2) Current market map: Factors that are working and areas where they are less effective

The current market is dominated by the narrative that 'tariffs = reignited inflation,' but there are factors being ignored behind the scenes.

Factors currently strongly recognized by the market (working):

• Tariff hike risk (2025-): Concerns over the introduction of universal tariffs (10-20%) or tariffs on China (over 60%) by the incoming Trump administration.

• Expansion of the fiscal deficit (U.S.): The continuation of a deficit on the scale of approximately $1.8 trillion annually, and the resulting high level of long-term interest rates (US10Y) (4.2-4.6% range).

• AI/Data center investment: Increase in Capex (capital expenditure) by Big Tech. This is considered a sanctuary that is less susceptible to the impact of tariffs.

Factors being downplayed/turned into noise in the market (less effective):

• Judicial risk (constitutional authority): The legal validity of the president continuing to impose tariffs without congressional approval. While this has been accepted under the shield of 'national security' until now, it could be overturned depending on changes in the composition of the Supreme Court or libertarian legal interpretations.

• Adaptability of import companies: Since the trade war in 2018, companies have already diversified their supply chains (China Plus One), so there is a possibility that the impact will not be as severe as the shock at that time.

3) Organizing the current state of macro, interest rates, exchange rates, and credit

If the Supreme Court were to say 'NO' to tariffs, the macroeconomic landscape would change completely.

Assumed ranges and drivers for key indicators (Scenario: 6 months after the decision to invalidate tariffs):

• US 10-year Treasury yield:

  • Assumed range: 3.50% to 3.80% (significantly lower than current levels)

  • Drivers: Decline in break-even inflation (BEI) due to lower import prices, and a dovish pivot by the Fed.

• USD/JPY:

  • Assumed range: 138.00 to 145.00

  • Drivers: Narrowing of the US-Japan interest rate gap due to lower US rates. However, since concerns about declining Japanese exports will also arise, a one-sided yen appreciation is unlikely.

• Import Price Index:

  • Assumed change: YoY -2.0% to -4.0%

  • Drivers: Removal of the tariff premium, normalization of transportation costs.

• Credit Spreads (HY):

  • Current status: Around 300bps (tight)

  • Change: Will widen temporarily (due to policy uncertainty), but will subsequently tighten due to improved creditworthiness of retail and consumer goods companies.

Here is my interpretation: Generally, the removal of tariffs acts as "deflationary pressure." When I was watching the market in 2018-2019, stock prices fell every time tariff news emerged due to concerns about "increased costs leading to decreased profits." Conversely, if tariffs are rejected, it becomes an "unexpected cost-cutting bonus" for companies (especially retail and tech). Since this directly impacts the P&L (Profit and Loss statement), the impact on stock prices is more direct than interest rate fluctuations.

4) Image of the ripple effects of international affairs and geopolitical risks

"NO to tariffs" does not just stop at the issue of tax rates; it means stripping the U.S. of its diplomatic cards.

Short-term (~6 months): A mix of chaos and joy

• China, Mexico, Vietnam, Europe:

  • Companies exporting to the U.S. will soar. This will be the biggest tailwind, especially for Chinese EV and solar panel manufacturers, and European luxury car and luxury brands.

  • Secondary impact: Due to the U.S. "pulling the rug out," the currencies of these countries (Yuan, Euro, Mexican Peso) are highly likely to rebound sharply against the dollar.

Medium-term (1-3 years): Structural changes

• Stagnation of reshoring (domestic return):

  • The economic rationale that "if there are no tariffs even if we don't make it in the U.S., we will make it cheaply overseas" will be revived. This will pour cold water on the factory construction boom within the U.S. (related to the IRA, etc.).

• Trigger: If the Supreme Court's ruling emphasizes the "infringement of Congress's taxing authority," it will become difficult for future presidents to use tariffs as a diplomatic tool.

5) Key points and stances by sector

Under this scenario, the current "winners" and "losers" will completely flip.

[Candidates for soaring] Retail, Consumer Discretionary, Apparel

• Representative examples: Discount stores, sporting goods, electronics retailers.

• Driver: Dramatic reduction in procurement costs (tariffs directly impacting profits). Increased consumer purchasing power.

• Why watch now: Many stocks currently have depressed valuations due to priced-in tariff risks.

[Steady] Semiconductors and Tech Hardware

• Representative examples: Smartphone manufacturers, PC peripherals, semiconductor back-end processes.

• Driver: The complexity of the global supply chain was a cost factor, but profit margins will improve with the disappearance of tariff risks.

• Note: AI regulations (export controls) are a separate "national security" issue from tariffs, so they are likely to remain subject to regulation.

[Devastated/Caution for sharp decline] Steel, Materials, Domestic Automobiles

• Representative examples: Major US steel companies, aluminum, the Detroit Three (GM/Ford, etc.).

• Driver: Resumption of the inflow of cheap overseas products. The pricing power protected by the "tariff wall" will collapse.

• Risk: A "double punch" of being caught in sales price competition while labor contract costs with unions (UAW) remain high.

6) Case studies (3-5 examples)

Here, we will break down the structures of specific companies. (*This is not a recommendation)

Case A: Major sports brand Company N (Retail/Apparel)

• Investment hypothesis: Many production bases are in Asia. The abolition of tariffs would be a direct reduction in cost of goods sold, with the potential to improve operating margins by 2-3 percentage points.

• Counter-evidence conditions: If consumption within China continues to slump and sales do not grow due to factors other than tariffs (such as a decline in brand power).

• Indicators to observe: Ocean freight rates from Asia (container rates) and the company's gross margin guidance.

• Common misconceptions: It is not guaranteed that they will 'lower prices if tariffs are removed.' It is common to keep prices steady to improve profit margins.

Case B: Major US steel company Company X (Materials)

• Investment hypothesis (short perspective): The current stock price assumes the 'exclusion of imported steel.' If the answer to tariffs is 'NO,' there is a risk that EPS forecasts will be halved as the company is exposed to competition from cheap steel from China, South Korea, and Brazil.

• Counter-evidence conditions: If demand from infrastructure investment acts and similar sources is extremely strong, and supply cannot keep up with imports alone.

• Indicators to observe: Hot-rolled coil (HRC) futures prices. Import steel inventory statistics.

• Common misconceptions: If there are individual factors such as 'acquisition reports,' M&A premiums may support the price more than fundamentals.

Case C: Discount store Company D (Retail)

• Investment hypothesis: Because they have low-income customers, inflation (passing on tariffs) was directly linked to a decline in sales. The disappearance of tariff risk means 'stable supply of cheap goods' and 'recovery in customer traffic'.

• Indicators to observe: Same-store sales growth rate, inventory turnover rate.

7) Investment stance by scenario

Scenario branching for the event of a Supreme Court ruling.

Scenario A: Complete unconstitutionality/Tariff invalidation (Probability: Low to Medium 15-20%)

• Trigger: The Supreme Court recognizes 'abuse of Section 232 of the Trade Expansion Act' and issues a ruling to halt tariffs without congressional approval.

• Tactics:

  • Long: Emerging market stock ETFs, US retail stock ETFs, shipping stocks.

  • Short: US steel stocks, Dollar Index (DXY).

• Exit criteria: If Congress shows signs of immediately passing new tariff legislation on a bipartisan basis.

• Assumed volatility: Extremely high (VIX 25-30).

Scenario B: Procedural deficiency/Remand (Probability: Medium 30-40%)

• Trigger: Temporary injunction due to specific procedural issues (such as lack of public comment).

• Tactics:

  • Since it buys time, inflation concerns will recede. Buy the dip on bonds (long-term government bonds). Sector rotation will occur in stocks, but it will not be as intense as in A.

• Exit criteria: If the government quickly amends the procedures and re-imposes the tariffs.

Scenario C: Ratification of administrative power/maintenance of tariffs (Probability: High 40-50%)

• Trigger: A ruling to maintain the status quo.

• Tactics: Continue the existing "Trump Trade." Maintain investments in inflation hedges (gold, Bitcoin) and domestic manufacturing.

• Exit criteria: If inflation accelerates too much and concerns about stagflation arise.

How to rebalance positions (from an individual investor's perspective): "Going all-in" is dangerous. While Scenario C is the main line, the damage if Scenario A occurs would be significant, so it is wise to design your portfolio to suppress overall volatility by allocating about 10-15% to "assets that profit from Scenario A (e.g., emerging market bonds or specific retail stocks)."

8) Practical aspects of trade/portfolio design

This is a blueprint for how to act specifically.

Entry design:

• Event dispersion: The day the ruling is issued is unpredictable (usually June, etc., but anytime for emergency cases). Therefore, the basics are to "act after the news comes out" or "hedge with options."

• Price range: A phase where target stocks are hitting recent lows due to "tariff concerns" is a good opportunity for a contrarian entry aiming for Scenario A (good risk-reward).

Risk management:

• Loss tolerance: Since trading on this theme has high uncertainty, set a stop-loss to limit losses to within 1.0% of account funds.

• Position size: Since volatility is increasing, reduce the size to about 60-70% of normal levels.

Insights from my failures: I once bet on a "policy change" and took a leveraged position. However, although the policy change itself occurred, there was a three-month time lag before the market reacted, and I ended up cutting my losses due to the carry costs and mental exhaustion during that time. Lesson: Even with "correct logic," if the "timing" is off, you will die. Especially since legal processes take time, you should use spot stocks with no expiration or options with long durations.

9) Watchlist for the coming weeks to months

These are the monitoring items to follow this theme.

• Supreme Court Docket:

  • Whether lawsuits regarding trade law and presidential authority (filed by industry groups such as AIsC) are accepted.

• US Retail Sales:

  • Strength and breakdown of consumption. Trends in 'furniture and home appliances' which are highly dependent on imports.

• ISM Manufacturing PMI:

  • The balance between 'Prices Paid' and 'New Orders'. Whether there is a rush in demand before tariffs.

• Shipping Freight Index (CCFI/SCFI):

  • Whether freight rates are spiking due to rush imports before tariffs.

10) Common misconceptions and points to clarify

Misconception 1: 'The other country pays the tariffs'

• Fact: It is the 'US importer' that pays tariffs to customs. If they pass the cost on, the 'US consumer' pays; if they cannot, the 'US company' bears the burden by cutting into their profits.

Misconception 2: 'Republicans = Free Trade, Democrats = Protectionism'

• Fact: This paradigm has collapsed. Currently, both parties are leaning toward 'protectionism' against a backdrop of populism. Therefore, a 'judicial resolution (Supreme Court)' is more realistic as a trigger for a return to free trade than a political one.

Misconception 3: 'If tariffs disappear, prices will drop immediately'

• Fact: Prices have 'downward rigidity.' Companies do not easily lower prices once they have raised them. What drops is not the price itself, but the 'rate of increase (inflation rate).' Alternatively, it manifests as an increase in sales and promotions.

11) Concrete actions starting tomorrow

Small actions you can take starting tomorrow after finishing this article.

1. Check the 'overseas sales ratio' and 'procurement dependency' of your holdings

   • Use IR materials or stock guides to confirm where the company manufactures and where it sells. In particular, recognize that 'Japanese companies with high US sales ratios' face double risks from exchange rates and tariffs.

2. Look at the trend of the 'Import Price Index' in a graph

   • Search for the Import Price Index on FRED (Federal Reserve Economic Data) or similar, and take a look at the trend over the past five years.

3. Hold a small amount of inversely correlated assets

   • If your portfolio is skewed toward 'US stocks and a strong dollar,' consider incorporating about 5% of assets that rise when protectionism retreats, such as commodities or emerging market stocks.

12) Disclaimer

This article is for informational purposes only and does not recommend any specific securities or investment strategies. Please make final investment decisions based on your own judgment and responsibility. The simulations and future projections presented in this article contain uncertain elements and may differ significantly from actual results.