Americans have more money in stocks than ever before. Economists say that’s a bright red flag
Updated Sun, September 28, 2025 at 2:43 PM MST 5 min read
Americans have more money in stocks than ever before. But while the market’s climb may be inflating their accounts, they are more exposed than ever to a potential market slump.
Direct and indirect stock holdings, including in mutual funds or retirement plans, accounted for an all-time high of 45% of households’ financial assets in the second quarter, according to Federal Reserve data.
The record-high stock ownership raises red flags about whether a market downturn could hit Americans’ personal finances — especially in an economy with an increasingly fragile labor market and stubborn inflation.
The milestone is a product of multiple factors: stocks have hit record highs, boosting the value of holdings; more Americans are directly participating in the stock market; and retirement plans like 401(k)s that invest in the stock market have risen in popularity in recent decades.
Record-high stocks are generally good — that lets more people benefit from Corporate America’s gains, especially long-term investors.
But it’s not all upside.
Because so many people now own and have so much of their money in stocks, the market has more influence on the economy, for good or ill, according to Jeffrey Roach, chief economist at LPL Financial.
“The impact of a stock market melt-up or a meltdown — it goes both ways — is going to be much more impactful across the economy than, say, just a decade ago,” Roach said.
Notably, Americans’ stock ownership has surpassed that of the late 1990s, just before dot com bubble burst, said John Higgins, chief markets economist at the consultancy Capital Economics.
“That should ring alarm bells, even if the buoyant stock market keeps rising for a while amid enthusiasm for AI,” Higgins said in a note to clients.
“Indeed, our forecast is that the S&P 500 will make further gains this year and next,” Higgins added. “But the current very high share of equities is a red flag to watch closely.”
The S&P 500 has rallied 33% since hitting a low point on April 8. The benchmark index is up 13% since January 1 and has notched 28 record highs this year.
The AI boom has fueled the market rally this year. Big tech companies like Nvidia (NVDA) have surged, lifting major indexes like the S&P 500, which are weighted by companies’ market value.
The Magnificent Seven tech stocks — including Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) — have accounted for roughly 41% of the S&P 500’s gains this year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Investors are benefiting, but as the S&P 500 becomes increasingly concentrated — the Mag Seven account for 34% of the S&P’s market value — they remain exposed to the fate of a few enormous companies.
A trader works on the floor of the New York Stock Exchange during morning trading on August 13, in New York. – Angela Weiss/AFP/Getty Images
It’s not just American households that are holding record levels of stocks. Foreign investors’ share of US stocks also hit a record high in the second quarter, according to Fed data.
History shows that when levels of stock ownership are at record highs, the risk of a downturn and the potential for below-average returns increases, according to Rob Anderson, US sector strategist at Ned Davis Research.
“Investors shouldn’t expect the same magnitude of returns that we’ve seen during the last decade to repeat,” Anderson said. “Going forward, over the next 10 years, there’s probably going to be a downshift in returns.”
Stocks and the economy
While the S&P 500 floats near record highs, concerns are also mounting about the emergence of a “K-shaped economy,” in which the richest Americans get even richer while the poorest Americans continue to struggle or get even poorer.
That’s in part because the job market, where most Americans make the bulk of their money, is stagnating, while the stock market, which is how wealthy people tend to make their money, is surging.
“Those who have a high degree of wealth in the stock market feel like they’re doing extraordinarily well,” said Michael Green, chief strategist at Simplify Asset Management. “Those who don’t, who are largely tied to employment as their primary asset, feel much more constrained in today’s society.”
That is creating distortions in economic data, too, helping to paint a rosier overall picture than the one many Americans are feeling in their lives. The buoyant stock market is propping up the net worth of the wealthy, fueling their own spending, which in turn has helped propel economic growth, Roach at LPL Financial said.
The data reflect that dichotomy: The top 10% of earners (earning more than $353,000 annually) accounted for more than 49% of consumer spending in the second quarter, the highest share on record going back to 1989, according to Mark Zandi, chief economist at Moody’s Analytics.
But underneath the hood, the economy is on shakier grounds: Lower-income Americans are increasingly strained, and if there is a market slump, it could spook the wealthy Americans who have been propping up the economy with their spending.
“The stock market becomes a bigger economic driver when you’ve got that much exposure,” said Kevin Gordon, senior investment strategist at Charles Schwab.
Gordon said while the market’s gains can spur consumer spending, the opposite can be true when the market tumbles.
“There is a bigger risk that to the extent you get a protracted downturn in the market, that starts to weigh on household spending, and starts to weigh on the psychology in particular of people up the wealth spectrum,” Gordon said.
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