Last week, I explained how President Trump’s “gold card” visa plan could benefit companies and regions catering to the wealthy. In the same article, I pointed out that consumer spending declined to its lowest level since February 2021, raising concerns about the sustainability of recent economic growth. Those two things—the best of times and the worst of times—have occurred simultaneously.
A staggering truth defines today’s American economy: the highest-earning 10 percent of Americans, those earning $250,000 or more, now account for nearly half of all consumer spending, according to a Wall Street Journal article.
This same group was responsible for 36 percent of spending 30 years ago. Today, they drive 49.7 percent. Nearly every other dollar spent in the United States—on travel, dining, shopping, entertainment, and even necessities—comes from the population’s wealthiest decile. This shift in spending power carries both threats and opportunities for investors.
How we got here: The wealth effect in action
The divide between those who spend freely and those who tighten their belts did not happen overnight. The past few decades have seen asset values—stocks, real estate, and business equity—skyrocket, disproportionately benefiting those who already owned them. During the pandemic, the government flooded the economy with stimulus checks, but the wealthiest Americans did not just spend their share—they invested it and watched their stock portfolios grow. They also saw their home values surge.
By the time the economy reopened, the richest Americans had more wealth than ever. The wealth effect was in full swing: When people feel wealthier, they spend more. Their newfound confidence led to spending on luxury vacations, designer goods, and high-end real estate.
Meanwhile, the picture was starkly different for the middle and working classes.
It is not that middle-class or lower-income Americans suddenly became frugal by choice; it is that their purchasing power has been from multiple angles. Those without investments saw no benefit from soaring stock markets and home prices. Inflation in essentials like food, rent, and energy acted like a tax, disproportionately affecting those living paycheck to paycheck. Aggregately, wages grew faster than costs, but workers felt the price change more than the paycheck increase. Pandemic-era savings and stimulus checks that briefly padded some bank accounts are dwindling. Credit card debt is at record highs, and with interest rates up, the cost of carrying that debt is biting.
Many Americans spend more dollars than before the pandemic but get less for it because of higher prices. If your grocery bill is 15 percent higher this year, that is money not going toward a new appliance or a night out. Higher interest rates make big purchases (like cars or homes) less affordable. The result is a widening gap in spending growth. The wealthy are essentially subsidizing economic growth by dipping into their deep pockets while others tread water.
While the top 10 percent of earners have been splurging, those toward the bottom are cutting back. In short, many households are in survival mode rather than splurge mode, which means the economy is even more reliant on the top 10 percent of earners.
What this means for investors
If you are an investor, you have likely already seen the effects of this wealth concentration in the stock market. Companies that cater to high-income consumers are thriving. For instance, airlines have reported record bookings for first-class and business-class tickets, while economy-class travelers have pulled back. High-end retailers are seeing strong growth, even as companies that serve middle-class consumers have been challenged.
If this trend continues, the takeaway is clear: Position your portfolio to benefit from the spending power of the wealthy. Luxury brands, high-end travel companies, and financial services catering to affluent clients stand to benefit. Obviously, this spending spree is tied to income and asset creation. A shock could cause the spending of the wealthy to slow significantly, dragging down the companies profiting from their largesse. Despite any temporary interruptions, however, I am betting that the trend will continue.
The risks of an economy built on the wealthy
It was not always this way. For a large chunk of the 20th century, especially the post-World War II era, the United States enjoyed a broad-based middle-class expansion. The mid-20th century saw a more balanced economy: Programs like the G.I. Bill, high marginal tax rates on top incomes, and strong unions helped create a thriving middle class. In the 1950s and 1960s, a factory worker could buy a house and a car and send kids to college on a single income. Economic growth was fueled by millions of families spending a bit more each year rather than by an elite slice making or breaking the consumer market. Inequality existed, but it was a far cry from today’s levels.
We are back to a pattern where economic fortunes are heavily skewed to the top. The last decade has seen a trend of growing inequality reminiscent of the late 1920s when the gap between the rich and everyone else was at a peak. The 1920s were referred to as the Roaring Twenties—an era of exuberant spending by the wealthy and increasing inequality, which ended in the Great Depression. When the market crashed in 1929, the spending power of the rich evaporated overnight, and with it went businesses and jobs that depended on their patronage.
The top earners have propped up growth recently, like during the Roaring Twenties, but it comes with risks. The most obvious is volatility. The economy becomes fragile when half of all spending comes from the wealthiest 10 percent. Any decline in stock prices, home values, or corporate profits could trigger a significant drop in spending, leading to a broader slowdown.
During the 2008 financial crisis, the net worth of the wealthiest Americans tanked along with the markets. Luxury spending dried up almost overnight. High-end retailers saw sales plummet by double digits. Art auctions were quiet. Unsold yachts sat idle. The businesses that catered to affluent clients were some of the first and most brutally hit. In that crisis, the pain was widespread, but it illustrated how the behavior of wealthy spenders can amplify economic cycles. When the wealthiest stop spending, it is not a gentle tap on the brakes—it can bring the economy to a screeching halt.
Last week, I warned that there are signs the economy is falling off a cliff. However, my best guess is a long period of below-trend economic growth. Both are bad. Investors can address both scenarios, but they need to do so in different ways. I have been considering how to position my investment portfolio to prepare for a correction and a long slog. However, I am tracking luxury sales and remaining open to the possibility that I might have to react to something more acute if cracks appear.
