FILE PHOTO: A view shows the New York Stock Exchange (NYSE) Wall Street entrance in New York City, U.S., April 7, 2025. REUTERS/Kylie Cooper/File Photo

By Johann M Cherian and Shashwat Chauhan

(Reuters) -U.S. investors returning from Labor Day break on Tuesday were hit with fresh uncertainty in trade policy after a federal appeals court ruled most of President Donald Trump's sweeping tariffs illegal, setting up a potential showdown at the Supreme Court.

Wall Street's main indexes fell about 1% on Tuesday, while longer-dated U.S. Treasury yields jumped, amid a global bond selloff on fiscal worries.

The court allowed the tariffs to remain in place through October 14 to give the Trump administration a chance to file an appeal with the U.S. Supreme Court. But the verdict did not affect tariffs imposed on steel and aluminum.

Trump on Tuesday said his administration will ask the Supreme Court for an expedited ruling on tariffs as early as Wednesday "because we need an early decision."

Several market participants said they were in a wait-and-watch mode for now, but the brewing uncertainty is adding to markets' list of worries, including concerns around the Federal Reserve's independence and increasing risks of U.S. stagflation.

"Whether it's the level (of the tariffs) or the timing or now questions about their validity, we've just got to let it play out," said Jim Baird, chief investment officer at Plante Moran Financial Advisors about the latest court ruling.

"What it will mean in the near term remains to be seen. How will our trade partners react to that? How quickly will this make its way through the Supreme Court now? Lots of questions, not a lot of answers."

Trump's steep levies on trading partners triggered market volatility in early April, but increasing clarity on tariff levels and hopes of interest rate cuts have since helped stocks rebound toward record highs.

"On a more intermediate-term basis, we think corporate uncertainty around tariffs will remain elevated, though lower than late spring levels," RBC's Head of U.S. Equity Strategy Lori Calvasina said in a note.

TRUMP'S TARIFF AGENDA NOT EXPECTED TO CHANGE

Treasury Secretary Scott Bessent said on Monday the administration has a backup plan if the Supreme Court does not uphold Trump's use of emergency powers to impose tariffs.

One of the tariff authorities the administration can use, he added, could be Section 338 of the Smoot-Hawley Tariff Act of 1930, which allows the president to impose tariffs of up to 50% for five months against imports from countries that are found to discriminate against U.S. commerce.

Raymond James Washington Policy Analyst Ed Mill said there are multiple other tariff authorities available to the Trump administration, supporting the view that "the process might change, but the outcome on tariffs will largely stay the same."

However, several investors fear that if the current ruling is upheld, the U.S. may have to issue tariff refunds to its trading partners - a move that could deepen fiscal concerns.

"The big question will be whether the courts deem that all tariffs collected under emergency powers must be refunded, which at this point could be a (nearly) $200 billion decision," strategists at Glenmede said in a note.

(Reporting by Johann M Cherian, Shashwat Chauhan and Medha Singh in Bengaluru; Editing by Shinjini Ganguli and Lisa Shumaker)