Q2 Stock Market Rally Masks Stark K-Shaped Economy as Wealthy Americans Drive Spending

Wealth Gap Widens as Stock Market Powers Economy

The stock market generated $53 billion in spending over the past year, equal to about a seventh of the 2.1% annualized growth rate in US gross domestic product last quarter. However, the top 20% of earners make up 57% of US consumer spending, according to the Dallas Federal Reserve. This concentration of gains reflects a fundamental shift in what's propping up the economy.

The saving grace of this economy that everyone hates: Wealthy Americans are keeping it afloat by spending—throughout tariffs, inflation, war, you name it. Those massive market gains have persuaded stockholders to spend, with share price gains being an important driver of spending on discretionary goods and services from older, wealthier households, which account for more than 50% of total spending in those categories.

The Spending-Inequality Feedback Loop

Three-quarters of spending created by the market rally flows through the top 20% of earners, according to Joe Brusuelas, chief economist at RSM US. The stock market gains that have helped keep the economy humming have exacerbated the yawning wealth gap, with big market gains contributing to the perception of a lack of equity and fairness in the economy, sparking outrage among many middle- and low-income Americans.

Systemic Risk and the K-Shaped Reality

"If we are counting on the stock market to sustain the consumer economy, we are leaning on a channel that deepens the K-shape rather than offsets it," Brusuelas said. If the opposite were true—if the market rally ended—it could make the economic situation significantly uglier for everyone. "It's a K-shaped market, and it's a K-shaped economy," said Heather Long, chief economist at Navy Federal Credit Union, adding that "The greatest risk to the economy is a downturn—and that risk is heightened when you have both of those Ks in play."