Wall Street had a bit of an identity crisis on Friday. It couldn't decide if it was happy or sad, so it did a little of both. The cause? A historic Supreme Court decision that basically told a former president, "Hey, you can't just make up tariffs whenever you feel like it." The result was a market neatly divided between the haves and the have-nots of global trade.
The Russell 2000, home to many smaller, U.S.-focused companies, dropped 0.4%. Meanwhile, the tech-heavy and globally-minded Nasdaq 100 climbed 0.5%. It was a classic case of what's bad for one part of the economy is good for another.
The whole thing started when the Supreme Court dropped a legal bombshell. The justices ruled that the International Emergency Economic Powers Act (IEEPA) does not give the president the authority to slap tariffs on trading partners. In language that would make your high school civics teacher proud, the Court grounded its reasoning in the separation of powers. "The Framers gave ‘Congress alone' the power to impose tariffs during peacetime," the Court wrote. "The whole power of taxation rests with Congress."
Think of it this way: the Court just reinstated the rule that only Congress holds the country's credit card for trade wars. The justices didn't address the messy question of whether the administration has to refund the more than $130 billion in tariffs already collected, but the message for the future was crystal clear.
Investors got the message, loud and clear. For years, many small- and mid-cap companies enjoyed a cozy shield from foreign competition thanks to those elevated import duties. With that shield potentially being dismantled, the fear is that competitive pressure from overseas could come rushing back in. Hence, the sell-off in the Russell 2000.
On the flip side, emerging markets threw a party. The iShares MSCI Emerging Markets ETF (EEM) jumped more than 1% to a record high. It's now on track for its ninth straight weekly gain, which hasn't happened since 2005. When the threat of arbitrary U.S. tariffs diminishes, companies and countries that export to the U.S. breathe a huge sigh of relief, and their stocks rally.
All of this market drama was playing out against a pretty challenging economic backdrop. It turns out the U.S. economy slowed down sharply at the end of 2025. GDP expanded at just a 1.4% annualized pace in the fourth quarter, a steep drop from the 4.4% growth in the prior quarter and well below the 3% economists were expecting.
And if slow growth wasn't enough, we also got a reminder that inflation isn't quite ready to leave the stage. The Personal Consumption Expenditures index rose 0.4% in December from the month before, pushing the annual rate up to 2.9%. More importantly, the Core PCE reading—the Federal Reserve's favorite inflation gauge—also rose 0.4% monthly. That bumped the year-over-year rate to 3%, just edging above estimates of 2.9%.
So to recap: growth is slowing, inflation is still ticking up, and the Supreme Court just rewrote the rules of trade policy. It was a busy Friday.
Not surprisingly, former President Donald Trump was not pleased. He blasted the ruling shortly after its release, calling it "a disgrace" and cryptically adding that he has "a backup plan for tariffs." He also decided to add another layer of uncertainty by saying the U.S. might consider a limited military strike against Iran. Just your typical Friday news dump.
