Stocks are driving consumption 'like never before' — and that exposes a big risk

The stock market isn't the economy in the way that Nvidia's share price won't help your nephew find a job, or save for a down payment, or afford double meat and guac at Chipotle.

There's a level of abstraction and distance from day-to-day, working-class life that can make stock watching seem exotic. But the enormous gains of equity holdings in recent years have changed the makeup and definition of wealth in the US, with even bigger implications.

In a way that has only become true in our moment, the stock market actually is getting closer to defining the economy and consumption.

That's one of the key arguments in a note by Doug Peta, chief US investment strategist at BCA Research, published on Monday.

"The stock market isn't the economy, but it's influencing it like never before," he wrote. Peta observed that household net worth was over eight times disposable income at midyear, marking an all-time high for that measure. For decades, Wall Street has delivered outsized, compounding returns, making equities and mutual funds an ever-greater portion of household wealth.

The value of households' equity stake is nearly three times their annual after-tax income, Peta found. That means the S&P 500 gaining 10% in a year boosts a household's capacity to spend equivalent to receiving a 28% raise.

As a result, Peta wrote, stock market moves can swing consumption and overall economic activity. Combined with sharp home price appreciation, surging portfolios have augmented consumers' firepower far more than in any previous cycle, he said.

This helps explain the years-long narrative of the resilient American consumer. The people who spent their way through COVID, the aftermath, and sustained periods of high inflation. Stocks making up a higher share of a household's net worth has meant consumption is more sensitive to equity market moves. In good times, stock upswings can override other factors weighing down the economy.

"Greater sensitivity has been a boon for activity in the current cycle, as increasing equity wealth has allowed households to spend more of their paychecks than they otherwise may have," Peta wrote.

If the way the Wall Street winds are blowing has a greater say on the American consumer — because stock holdings increasingly define American wealth — that means the next bear market will have amplified influence.

Because instead of people feeling rich and spending through it, they will feel vulnerable and pull back.

In that very real sense, the stock market and the economy would sink together.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban .