Consumers are facing an uphill battle as they navigate a complex landscape marked by rising concerns, including the threat of AI displacing jobs, persisting inflation, and fluctuating gas prices due to geopolitical tensions, particularly the ongoing US-Iran war. Compounding these challenges, the stock market has emerged as a new factor affecting household financial stability.
Recent analysis from economists highlights the “wealth effect,” a phenomenon that illustrates how fluctuations in stock prices can significantly influence consumer behavior. As stock values rise, individuals experience an increase in perceived wealth, leading to a boost in consumer spending. However, the recent trend of declining stock prices since the beginning of 2026 threatens to reverse this effect, potentially dampening consumer sentiment and spending ability.
Economic research firm Pantheon Macroeconomics has projected that households could see a staggering loss of $1.5 trillion in wealth during the first quarter of 2026. This decline would signify the most severe downturn since the inflation-driven bear market of 2022, with analysts estimating it could result in a $50 billion reduction in consumer spending.
Looking at established research from 2025, the relationship between wealth and spending suggests that for every dollar increase in wealth, consumer spending typically rises by approximately $0.035. However, according to Pantheon’s chief US economist, Samuel Tombs, the impact of stock market volatility could be even greater this time around. Increased public interest in the stock market is evident from Google Trends data, which indicates that searches related to the stock market in April 2025 were more than double those in May 2022, despite similar levels of market turbulence.
This heightened awareness may amplify the psychological effects of stock price changes on consumer behavior. Tombs notes that industries sensitive to discretionary spending, such as recreation services, hotels, and dining, could face particularly severe repercussions as consumer confidence wanes amidst rising household costs.
Tombs expressed skepticism about the ability of discretionary services spending to remain stable in the coming months, citing the combined pressures from escalating gasoline prices, the negative repercussions of the wealth effect, and a noticeable decline in consumer confidence reflected in recent surveys. While current tax refunds may provide temporary financial relief, they may not suffice to offset the broader spending slowdown anticipated for this year.
A potential reduction in consumer spending could eventually create a feedback loop impacting stock market performance, causing corporate earnings to lag and shifting investor expectations regarding interest rates. As Tombs noted, a “growth scare” seems likely for the second quarter. This further underlines the importance of monitoring consumer behavior and market dynamics in the current economic climate.
