The AI wealth effect
Add Axios as your preferred source to
see more of our stories on Google.
Most of the benefits of the AI boom, for humans at least, have filtered into the stock market — but that leaves a lot of folks out.
Why it matters: Record wealth from stock market gains is helping drive strong consumer spending and economic growth overall, but it's a fragile situation: What goes up can come down, after all.
- Plus, there are plenty of Americans who have little or no exposure to the market — especially lower-income households — and they're currently struggling to deal with falling real wages, rising gas prices and stubbornly high inflation.
By the numbers: Americans' wealth jumped by $12.8 trillion in the second quarter, per Fed data, led by a nearly $11 trillion gain in stock holdings and other financial assets (see chart). That's the biggest single quarterly increase, in dollar terms, on record.
- Household equity holdings climbed to $74 trillion in Q2, a record high, up from $63 trillion in Q1.
Zoom out: "The AI boom, and the expectations of all the future earnings that will come from it, have delivered extraordinary increases in the value of the stock market," says Krishna Guha, head of economics at Evercore ISI, who wrote about the wealth effects of this surge this week.
- And that increase is fueling spending in the U.S. economy: Half of all the growth in consumption is now being driven by those wealth effects, he says.
- For lower earners with less wealth, tax refunds and the use of savings are also keeping American spending chugging along.
It's not a K-shaped economy, he says, but a "gator economy" — as in an alligator's mouth, where the bottom stays flat and the top is pointing to the sky poised to chomp.
Zoom in: The share of people making net withdrawals from investment accounts has doubled since 2019, according to anonymized data from more than 20 million JPMorgan Chase bank accounts.
- Higher-income people age 65 and older are leading that rise, but the bank says withdrawals have increased across all age and income groups.
Between the lines: The stock market today is becoming more important to the economy — because of the market's astronomical growth.
- Folks in the market both spend more of their investment gains — and also spend more because they psychologically feel wealthier.
What to watch: In the event of a stock market downturn, the economy would be more vulnerable than normal, Guha says.
Reality check: While an increasing number of Americans do have some money in the market — it's primarily the richest who are seeing these gains.
- The top 1% by wealth held 51% of stocks and mutual fund shares in the second quarter, per Fed data. The bottom 50% held less than 1%.
- Because so much of the stock market gains go to wealthier Americans, that spending effect is muted. Each dollar of wealth gained in the market equals about a penny of spending, according to research from the Federal Reserve last year.
The bottom line: We often say the stock market is not the economy, but these days it increasingly looks as if it is.
Bonus chart:
Follow the money: Stocks, not houses, have been the largest single asset on household balance sheets for a while — and the gap is widening.
