The Double-Edged Sword of Wealth Effect: How Stock Market Growth is Propping Up the Economy Amid Rising Risks

The Wealth Effect: Why A Resilient Stock Market Might Be Masking Recession Risks

Many strong forces hit the economy. Tariffs hurt trade, political doubt grows, and the job market stays slow. Yet the U.S. stock market shows strength in 2025. This strength holds up consumer spending. It stops the slide toward a recession that many experts expected earlier.

Stock Market Growth Powers Consumer Spending

New data shows strong numbers in key parts:

Consumer Spending: In August, spending rose more than expected.
Income: Households earned more than forecasts.
Housing: New home sales hit a high not seen in three years.
Inflation: Price rises stayed low and steady.

This power comes from the wealth effect. When assets grow in value, stock holders feel more sure. They then spend more money.

Mark Zandi, chief economist at Moody’s Analytics, spoke on CNBC. He said high net worth households drive most of the spending gains. The stock market indexes, like the Dow Jones and Nasdaq Composite, posted strong gains in 2025:

Dow Jones Industrial Average: +9% year-to-date
Nasdaq Composite: +23% year-to-date

A Tale of Two Consumer Sentiments

The University of Michigan survey shows two trends:

Consumers with large stock holdings feel steady. They see their portfolio values rise.
Those with few market ties feel less sure and drift away from the market trend.

The top 10% of earners hold almost 87% of the market, as noted by the St. Louis Federal Reserve. This gap shows why growth feels uneven.

The Double-Edged Sword of Market Dependence

A lively stock market now helps the economy. Yet some warn that this help carries risk. Zandi said:

"The economy is at risk if the market falls for any reason. When screens show losses, people save more and spend less. With a weak job market, this risk may start a recession."

The S&P 500 now stands at 22.5 times the expected earnings for the next 12 months. This level is above both five-year and ten-year averages, which suggests prices may be too high.

Broader Economic Data Still Shows Strength

Other data also marks a strong economy:

GDP Growth: In the second quarter, GDP revised up to a 3.8% annual rate. The Atlanta Fed predicts a 3.9% rate for Q3.
Durable Goods & Home Sales: Both parts show gains that mark strong demand.
Job Market: Job growth remains soft, but low layoffs keep employment steady.
Inflation: Core inflation sits at 2.9% each year. This rate is above the Fed’s target of 2% but fits expected trends. This trend may lead banks to lower rates later.

Chris Zaccarelli, CIO of Northlight Asset Management, said:
"Even when surveys show worry, people keep spending. This spending lifts company profits above forecasts."

The Fine Line Ahead

Many consumers stay cautious, especially those not in the top investor group. Elizabeth Renter, senior economist at NerdWallet, explained that while gains help stock owners, regular buyers face higher prices at the checkout—like rising food costs that lower confidence.

"People watch risks from inflation and job worries. Many feel unsure about the future even if spending does not drop," she said.

In the end, the economy rides on thin ground. The stock market’s strength has stopped a wider downturn so far. Still, if moods shift, that support may fade quickly.

Conclusion

The wealth effect from a rising stock market helps the U.S. economy. It underpins consumer spending and builds growth signs that stray from recession forecasts. High prices and the concentration of gains in a small group of investors bring risk. Policymakers, businesses, and consumers now face a careful balance in which the market’s path may shape the future.

For the latest updates on the markets and economy, stay tuned to CNBC’s coverage and expert analysis.

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