The economy’s biggest risk may not be tariffs or private credit but the stock market itself, where roughly $9 trillion in equity gains over the past year have powered high-income spending that could quickly reverse if portfolios start flashing red instead of green.
“The surge in stock prices is so key to the well-to-do who are driving consumer spending,” Mark Zandi, Moody’s Analytics chief economist, told Yahoo Finance on Friday. “If that gets turned into reverse and we see stock prices decline, then that’s the real threat to the economy in my mind.”
Moody’s estimates the top 10% of earners account for about half of all consumer spending, a dynamic that’s kept growth steady even as inflation and tariffs bite lower-income households. That link between spending power and market performance has become increasingly evident amid fresh market swings.
US stocks rose on Friday as President Trump eased fears of a further trade escalation with China, rebounding from Thursday’s steep losses sparked by renewed worries over private credit. Regional banks, including Zions (ZION) and Western Alliance (WAL), also recovered after reports of fraudulent loans and mounting credit stress added to investor jitters against the backdrop of a prolonged government shutdown.
Still, Zandi said those risks pale next to what’s building in financial markets, where a sharp reversal could quickly shake the confidence of the wealthy households powering US growth.
“Of all the risks out there, from what’s going on in the banking system to the government shutdown and everything else, that’s the one that’s at the top of my list of worries,” he said.
“I’m more sanguine about the banking system,” he added. “I’m less sanguine about financial markets. Valuations are high. …Everything feels a bit juiced, overvalued, bordering on frothy.”
Zandi warned that froth is directly tied to the same high-income households driving US consumption. That means if market gains unwind, the very group propping up spending could quickly pull back.
Deborah Weinswig, founder and CEO of Coresight Research, which tracks global retail and consumer trends, said the split between high- and low-income households is at its highest level since January 2020.
“The high-end consumer right now is still very strong and stronger than we would have even expected,” Weinswig said, noting spending among wealthier shoppers has continued to rise through the fall.
At the same time, lower-income households are stretching their budgets by visiting more stores per trip, about five or six now versus three before the pandemic, as they hunt for bargains and stack promotions.
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