Wall Street Boom Masks Growing Economic Fragility as Wealth Concentrates Among Top Earners, Economist Warns

The remarkable resilience of the U.S. economy may be hiding a growing vulnerability that could be exposed if financial markets stumble, according to Diane Swonk, chief economist at KPMG, who warns that America’s expansion has become increasingly dependent on a relatively small group of affluent consumers enriched by the stock market’s AI-driven rally.

The concern is based on the growing concentration of wealth and spending power among high-income households, a trend that has helped sustain economic growth even as millions of Americans continue to struggle with the lingering effects of inflation and elevated borrowing costs.

“We have built up a mountain of wealth that is highly concentrated,” Swonk said.

The warning comes as U.S. equities continue to hover near record highs, fueled largely by investor enthusiasm surrounding artificial intelligence, cloud computing, and digital infrastructure. The surge has dramatically increased the wealth of households with significant exposure to stocks, particularly higher-income Americans whose portfolios have benefited from the multiyear bull market.

That dynamic has strengthened what economists call the “wealth effect”—the tendency for consumers to spend more when the value of their assets rises. As stock portfolios swell, affluent households often feel more financially secure and become more willing to spend on travel, luxury goods, entertainment, housing, and other discretionary purchases.

The challenge, however, is that this spending power is becoming increasingly concentrated. According to research from Moody’s Analytics, Americans in the top 20% of the income distribution—those earning more than $175,000 annually—now account for nearly 60% of total consumer spending in the United States.

That statistic underscores the emergence of what economists describe as a “K-shaped economy,” where wealthier households continue to prosper while many lower- and middle-income consumers face persistent financial pressures.

Mark Zandi, chief economist at Moody’s Analytics, has argued that the K-shaped economy remains firmly intact. While affluent households have benefited from rising asset values, the spending power of the remaining 80% of Americans has struggled to keep pace with inflation.

The result is an economy that appears strong when viewed through headline indicators such as GDP growth, employment, and consumer spending, but feels considerably weaker to a large portion of the population.

“That has left us with an economy that looks better in the aggregate than it feels to most Americans,” Swonk said.

The divergence helps explain one of the biggest puzzles in the U.S. economy over the past several years: why consumer sentiment surveys have often remained depressed even as economic growth and spending data have exceeded expectations.

Traditional economic models assume that broad-based improvements in economic conditions translate into improved consumer confidence. Today’s economy appears different because much of the growth is being driven by a relatively narrow segment of high-income households whose experiences differ significantly from those of average consumers.

For policymakers and investors, this concentration creates a new risk. This is because if economic activity is increasingly dependent on affluent consumers, then the sustainability of growth becomes more closely tied to the performance of financial markets. A sharp decline in stock prices could weaken household wealth, reduce spending among higher earners, and potentially create ripple effects across the broader economy.

“The unknown is whether those same affluent households will continue to spend as freely if financial markets correct,” Swonk said.

That question has become more relevant as valuations in several market segments reach elevated levels. The artificial intelligence boom has propelled technology shares to extraordinary heights, creating enormous gains for investors but also raising concerns among some economists and market strategists about potential overheating.

A market correction would not affect all Americans equally.

Higher-income households would likely absorb the largest paper losses because they hold a disproportionate share of stocks and other financial assets. However, because those same households are responsible for such a large share of consumer spending, a pullback in their expenditures could have consequences for businesses across the economy.

Swonk highlighted that risk when discussing the historical relationship between wealth and spending.

“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 said.

The concern is not necessarily that a stock market decline would trigger an immediate recession. Wealthier households generally possess substantial savings, diversified assets, and stronger balance sheets than lower-income consumers. Those financial buffers could help soften the impact of a downturn.

Yet the concentration of spending power means the margin for error may be narrower than aggregate economic data suggest. The issue is becoming alarming because consumer spending accounts for roughly two-thirds of U.S. economic activity. If affluent consumers begin to reduce discretionary purchases, sectors ranging from travel and hospitality to housing, retail, and financial services could feel the effects.

The situation represents the broader U.S. economy over the past decade. Rising asset prices, booming technology stocks, and growing ownership of financial assets have increasingly benefited households at the top of the income distribution. Meanwhile, many middle-income families have faced rising housing costs, healthcare expenses, and other essential expenditures that have eroded purchasing power.

The AI boom has amplified those trends. Investors with exposure to technology companies have seen substantial gains, while households without significant stock ownership have captured fewer benefits from the rally. As a result, the same forces that have helped propel economic growth may also be creating a source of vulnerability.

For now, affluent consumers continue to spend, helping support employment, corporate earnings, and overall economic activity. But economists now acknowledge that the durability of the expansion may depend less on the average American consumer than on the willingness of wealthy households to keep opening their wallets.

That means that if financial markets remain strong, that dynamic could continue to support growth. If markets stumble, however, the concentration of wealth and spending that has powered the economy may become one of its biggest weaknesses.