Stocks are increasing sentiment among wealthy people. Labor market collapse could end it

As stock market investors support business confidence, some economists worry that an easing labor market could worsen the economy.

The widely followed University of Michigan Consumer Confidence Index fell more than 6% in November, near an all-time low and about 30% lower than a year ago. Survey director Joan Hsu said respondents were concerned that an extended shutdown of the federal government would be a drag on the economy.

But at least one group resisted the sour mood. It is the group that owns the most shares.

Individuals with significant wealth in the stock market reported an 11% improvement in sentiment, which Mr Hsu linked to the stock market’s recent rise to all-time highs.

The conventional wisdom is that wealthy consumers will continue to spend as long as they are satisfied with their situation and see their investments grow, promoting the economy and corporate profits. But other economists are now concerned that restarting the federal labor data could paint a bleak picture of the economy and trigger a market selloff that would throw cold water on the rosy outlook.

“It comes down to the labor market,” said Luke Tilley, chief economist at M&T Bank and Wilmington Trust. “Once you start getting negative job prints, the jig is at its limit.”

K-shaped economy

Economists told CNBC that the stock market is behaving as if the economy were in a “K” shape, with high-performing companies thriving and low-performing companies struggling.

Investors are counting on “K” luxury goods to continue to perform well and spend some of their discretionary income. The group’s resilience in the face of high tariffs this year and a temporary drop in stocks in April has eased concerns that the economy could slip into recession soon.

For example, Joe Brusuelas, chief economist at RSM, said he doesn’t expect high-end consumers to crack up and cause a recession, but the Michigan survey data highlights “severe market stress” on lower-end consumers who don’t own stocks and don’t benefit from artificial intelligence trading.

“The rise in stock valuations partially masks the structural changes in the economy underway in downstream markets, which are not favorable to those working in traditional industries,” Brusuelas said. “It points to a very highly fragmented economy that (a) has different realities based on the economic decile in which you live.”

In other words, how much money do you make and how many investments do you hold?

housing assets too

Jeffrey Roach, chief economist at LPL Financial, said the wealthiest consumers are also likely to benefit from rising home values ​​for their properties and, in many cases, lower mortgage rates obtained during the coronavirus pandemic. That’s another reason for the group to be optimistic, he said, even if the stock market rally loses steam this year.

benchmark S&P500 Excluding dividends, the stock will rise more than 16% in 2025, putting it on track to win for the third consecutive year. focused on technology Nasdaq Composite is up nearly 22%, highlighting continued excitement around AI.

Roach said the expected corporate profits from President Trump’s “big, beautiful bill” justify some frothing in the market, and the promise of profits from AI could lure investors into buying highly valued stocks.

turn to labor

How long the economy remains dependent on upper-tier consumers could depend on labor market conditions, Roach said.

Reducing immigration under the Trump administration may make it easier for people to return to the workforce as long as demand continues. This could increase household incomes and help the economy avoid a possible future recession, Roach added.

But Tilley of M&T Bank and Wilmington Trust said red flags are flashing. There is also data showing that small and medium-sized enterprises are cutting back on staff. Nonfarm payrolls appeared to be showing signs of weakness even before the latest jobs report was canceled due to the government shutdown.

Weaker employment will make it harder for investors to park their money in the top tiers of K-shaped economic holding companies. Tilley, who spent about six years as an economic advisor at the Philadelphia Fed before joining Wilmington Trust, said he feels like the idea that wealthy consumers can single-handedly prop up demand has been “reverse engineered” to rationalize why the stock market has soared to a record high despite job market uncertainty.

“History has shown us that when negative job postings start coming in, the economy and the market turn around soon after,” Tilley said. “We are 100% focused on the labor market and we see there are a lot of deficiencies there.”