The US economy is especially vulnerable to a stock market correction, KPMG chief economist Diane Swonk warned.
High earners have been a pillar of the economy in recent years, with the AI trade driving the stock market to fresh record highs and enhancing the so-called wealth effect for many. The bull market has intensified the K-shaped economy since the top cohort of consumers have more wealth tied to the market.
“We have built up a mountain of wealth that is highly concentrated,” Swonk explained.
“Will that historic pattern hold if financial markets correct or is the cushion large enough to blunt the blow? That is one of many things that keeps me up at night,” she added.
The wealthiest Americans are a major driving force of the economy, research from Moody’s Analytics found.
Mark Zandi, Moody’s chief economist, said the K-shaped economy is alive and well, as the top 20% of earners—Americans who make more than $175,000 annually—accounting for nearly 60% of spending.
In the same period, spending from the bottom 80% fell short of inflation.
Both Zandi and Swonk tie the K-shaped economy to the disconnect between bleak consumer sentiment readings and strong economic data.
“That has left us with an economy that looks better in the aggregate than it feels to most Americans,” Swonk explained, noting that this leaves the economy more susceptible to a market downturn.
The highest earners are spending despite inflation, driving economic growth, as their wealth on paper grows as the stock market continues to hover near records.
“The unknown is whether those same affluent household will continue to spend as freely if financial markets correct,” she said.