A rally in stock markets has been delivering a wealth windfall to Americans. The S&P 500 hit a record high 22 times in the first three months of 2024, the most since 1998. Having delivered a return of 26% to shareholders in 2023, the index is already up close to 10% already in 2024, as of 5 April.
This has helped push the net worth of Americans to a record high of US$156 trillion, a gain of US$11.6 trillion compared with the start of 2023, based on March data from the Federal Reserve. The bulk of this came from an approximate US$8 trillion gain in the value of equities held directly and indirectly by households. Investors holding eurozone equities also have reason to celebrate, with the Euro Stoxx 50 index returning 19% last year and over 10% in 2024, as of 5 April.
The big question for companies in both the US and eurozone is how much of this bonanza consumers will spend. Should CFOs and other executives be gearing up for a shopping spree? If so, which sectors stand to gain most? And how concerned should executives be by the risk of a negative wealth effect if the stock market boom turns into a bust?
‘For most households, wages have a far larger effect on spending than changes in their wealth’
The essence of this wealth effect is that as people see the value of their assets rise, they become more confident about their financial future – making them willing to spend more of their income, save less or borrow more.
Wealth effect enigma
While this seems simple enough, the wealth effect is considered something of an enigma by economists. ‘The willingness of people to spend windfalls of wealth is hard to measure, and varies between cultures and over time,’ says Andrew Kenningham, chief European economist at Capital Economics. ‘It also appears to vary depending on the source of the assets – whether this is housing or stock wealth. And of course, for most households, wages have a far larger effect on spending than changes in their wealth.’
But despite these caveats, the latest research from Visa contains an encouraging message for companies – especially in the US. The credit card company calculated Americans in 2022 tended to spend an average of 34 cents for every dollar increase in the value of their financial portfolio – compared with just nine cents five years before.
Why has this transformation taken place? First, Americans are more plugged in to exactly how wealthy they are. ‘The personal smartphone era, combined with the expansion of the 24-hour news cycle, has had a clear and distinct impact on the availability of information about wealth,’ Visa’s report concluded. ‘Consumers have faster access to information about their own financial situation, making their spending choices more sensitive to fluctuations in asset markets.’
‘Overall, Europeans are far less likely to invest in financial assets’
Demographics may also be having an impact. Over the past five years the number of retired individuals in the US has grown by 18% or just over seven million. This cohort has generally stopped generating income and so is more reliant on wealth. Additionally, as they approach the final years of their lives, holding back may make less sense.
But not all consumer-facing businesses stand to gain. The top 1% of wealthiest Americans now own close to 50% of equities and mutual funds, according to research from the Fed, up from closer to 40% at the turn of the millennium. By contrast, the bottom 50% hold a tiny 1%.
Favouring the affluent
The upshot is that companies targeting the top tier of most affluent Americans may be able to plan on a faster-expanding market than firms focused on less well-off consumers. In addition, Visa has calculated that consumers may be most willing to spend increases in wealth on leisure and travel – though this calculation was made soon after travel-deprived Americans emerged from Covid-19 lockdowns.
So, what about Europe? After all, European stocks have also been surging. The region even has its equivalent to America’s Magnificent Seven, the mega-cap tech stocks that have been leading the US rally. Europe’s ‘Granolas’, an acronym coined by Goldman Sachs that includes the region’s top pharmaceutical giants such as weight-loss drugmaker Novo Nordisk, have also been hitting record highs in 2024.
‘Germany’s financial culture is very different from the one in the US’
Sadly, there are several reasons that eurozone executives are less likely than their US peers to enjoy a wealth-driven surge in spending in their home market, says Kenningham. ‘Overall, Europeans are far less likely to invest in financial assets,’ he observes. While the value of financial instruments held by US household assets is equal to around 310% of GDP, the equivalent figure in the EU is just 90%, according to AFME data reported by Bloomberg.
Instead, cautious Europeans are more likely to be sitting on cash deposits, which actually fall in real value with inflation. Based on OECD data, from 2019-22 Germans, for example, held around 43% of their financial assets in cash, compared with just 13% in the US. This greater sense of caution that leads to this pattern of investing may make Germans more reluctant to spend equity-derived gains when they do arise. ‘Germany’s financial culture is very different from the one in the US,’ Kenningham says.
The bottom line is that many consumer-facing US companies – especially those geared towards older and richer consumers – may be well advised to brace for even more robust demand in years ahead. Of course, the gains will also be shared with European rivals that export or produce in the US, especially producers of luxury goods and high-end vehicles.
And, naturally, there is the risk that the equity boom could turn to bust. Visa has noted that the wealth effect can be symmetrical, leading consumers to cut back in tough times. But while all rallies come to an end, most market analysts believe that the latest upswing in stocks has been well supported by the strength of the US economy along with hopes that the rapid commercialisation of artificial intelligence will boost corporate profits in the years ahead.
