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The US federal appeals court ruled on Tuesday that President Trump’s tariffs imposed under the International Emergency Economic Powers Act (IEEPA) may remain in effect while their legality is reviewed. The market reaction so far has been muted, with the Hang Seng index up 0.9% in Asian trade on positive US-China talks in London and S&P 500 equity futures pricing a modest 0.2% decline ahead of the US open early Wednesday.

The ruling on “Liberation Day” tariffs, previously blocked by a lower court for exceeding presidential authority, impacts both broad-based tariffs on most US trading partners and targeted measures against exports from Canada, Mexico, and China related to immigration and narcotics concerns. The ruling does not affect sector-specific tariffs under other statutes, such as Section 232 levies on steel and aluminum.

The appeals court decision represents a near-term win for the administration’s tariff policy and offers President Trump renewed leverage in ongoing high-stakes trade negotiations. But we caution investors against drawing overly negative conclusions for several reasons:

Legal uncertainty will remain high, with an appeal to the Supreme Court likely. No US court to date has upheld the president’s unilateral use of the IEEPA to impose tariffs, and multiple legal challenges remain in progress. All lower court findings to date have suggested the use of emergency powers in this context is unlawful. Further appeals all the way to the Supreme Court are anticipated, and our base case is for the Supreme Court to ultimately strike down this use. Regardless of the outcome, the level of tariffs in place may remain unsettled as negotiations continue.

Recent Trump administration actions point to negotiation, not escalation. Prior statements from Trump administration lawyers argued that stripping the administration of authority to use IEEPA tariffs would “completely kneecap” their ability to negotiate with China, suggesting tariffs will serve more as leverage than as a revenue driver. This week’s US-China framework agreement in London further indicates both sides are seeking compromise, particularly on export controls, and are keen to avoid a renewed escalation in trade tensions. In recent weeks, the White House reportedly called on global trade partners to submit their best offers on trade concessions, in an apparent bid to accelerate negotiations.

The economic cost of tariffs will build gradually, increasing pressure on the White House. While the peak level of “reciprocal” tariffs exceeded consensus expectations, there was little doubt that Trump would indeed impose some level of tariffs. This incentivized companies to stockpile imports and consumers to make early purchases. The impact will start to become more apparent as this front-loading effect wears off. The US labor market remains resilient for now, but any drag on job creation from tariffs may be masked in the near term by other factors, such as changes in immigration enforcement. We think overly punitive tariffs would eventually dampen trade volumes, undermining the fiscal revenues needed to fund the administration’s broader policy agenda.

So, while reimposing IEEPA-linked import tariffs could impose costs on both US growth and earnings, we think trade-policy volatility should not deter global investors from deploying capital. In the event the IEEPA-linked tariffs are ultimately struck down, our base case is for the Trump administration to lean more heavily on sector-specific tariffs, which we think may have a more firm legal standing. Our base case is that the level of effective tariffs ends the year near 15%, with the level on Chinese goods higher at 30-40%.

We expect US equities to move higher over the next 12 months, with interest rates likely to decline and cash returns to come under pressure. For investors under-allocated to risk assets, we recommend phasing into equities or balanced portfolios to manage uncertainty while building long-term wealth. Investors seeking to buffer portfolios against volatility should maintain sufficient exposure to medium-duration, high-quality government, and investment-grade bonds, which are likely to perform well in adverse growth scenarios.