Key Points
- A top economist warns that the stock market is now the biggest risk to the U.S. economy.
- The $9 trillion in stock market gains over the past year has been the main driver of consumer spending.
- The top 10% of earners, who are heavily invested in the market, account for half of all spending.
- A market downturn could cause these wealthy consumers to pull back, hurting the entire economy.
The biggest threat to the U.S. economy might not be tariffs or a banking crisis, but the stock market itself. That’s the warning from Moody’s Analytics chief economist Mark Zandi, who says the massive $9 trillion in stock market gains over the past year has been the main driver of consumer spending, and a reversal could spell big trouble.
“The surge in stock prices is so key to the well-to-do who are driving consumer spending,” Zandi said. “If that gets turned into reverse and we see stock prices decline, then that’s the real threat to the economy in my mind.”
The top 10% of earners, whose wealth is closely tied to the stock market, now account for about half of all consumer spending in the U.S. This “wealth effect” has kept the economy chugging along, even as lower-income households are getting squeezed by inflation.
But Zandi warns that the market is looking “juiced, overvalued, bordering on frothy.” If that froth disappears, the very same wealthy households that are propping up the economy could quickly pull back on their spending, sending the economy into a downturn.
This highlights a growing “bifurcation of the consumer.” Wealthy shoppers are still spending, but even they are starting to look for bargains. Meanwhile, lower-income households are being hit hard, stretching their budgets and hunting for deals. The clear winners in this environment are discount retailers like Walmart and high-end luxury brands, while the middle is getting squeezed.
