This earnings season has confirmed what we have suspected for a while but what has been difficult to back up in the data. The US consumer seems to be finally cracking under the weight of higher energy prices, depleted savings and the rising cost of everyday goods.
Even though the investor focus is on everything AI, the US economy remains disproportionately dependent on household spending, which accounts for two thirds of gross domestic product (GDP). So, if the AI bubble bursts, consumers and the companies servicing 90% of the US income spectrum are in no position to pick up the slack.
Walmart, which is still the largest physical US retailer, reported that the average customer is now filling their tank with less than 10 gallons of fuel at a time, a sign of household budget stress the company said it had not seen since 2022. It added that it had to absorb US$175 million in higher fuel costs in its distribution and fulfillment operations in the first quarter. Costco also reported high consumer price sensitivity, with members using its petrol stations for the first time.
With a final resolution in the Iran war still looking fragile, inflation is unlikely to go anywhere but up, so the risks of stagflation or a mild recession are increasing by the hour.
The aggregate data doesn’t show how households are struggling
Not that you would see this clearly in the official government data. On paper, the economy looks dandy. Aggregate consumer spending, unemployment and corporate profits all look very reassuring. Corporate profits as a share of GDP hit 18.4% in the first quarter, the second highest reading since records began in the 1940s. The S&P 500 kept hitting new records after every wobble.
However, we’ve known for a while that many of these headline numbers are held up by a narrow range of wealthy households and about 10 large-cap tech stocks, leaving the economy and the stock market overly reliant on a small cohort.
A recent Minneapolis Federal Reserve paper looked at this so-called K-shaped economy and found that the top 10% of US households account for between 35% and 50% of all consumer spending. Meanwhile, Federal Reserve (Fed) data shows that the richest 10% hold roughly 90% of US equity holdings, and US equities are up well over 25% over the past year.
Figure 1. US household net wealth
Source: Federal Reserve, 26 March 2026. Data through 31 December 2025.
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As long as that cohort keeps spending off the back of asset gains, the headline number stays firm almost regardless of what is happening to the other 90%. If they stop spending, we could be in even more trouble.
Credit cards are maxed out
However, it doesn’t leave a lot of resilience in the system if and when the AI bubble finally pops. The 90% of mass market, middle-to-lower income consumers now look pretty broke. Most of this cohort are already relatively high proportional users of credit so this is not a new untapped additional resource, as some have suggested.
The personal savings rate fell to 2.6% in April, down from 4.9% a year earlier and the lowest since 2008 while disposable personal income also declined as households spent more on bills. The flow of consumer debt into serious delinquency rose from 2.45% to 2.83% in the first quarter, with student loan debt deteriorating most sharply.
It also leaves Fed Chair Kevin Warsh, who heads his first meeting next week, in a tricky spot. Markets are now pricing a 60% probability of an October rate hike, per Fed Funds futures markets. Raise rates to fight inflation, driven largely by an external energy shock, and the consumer contraction deepens. Hold, and inflation becomes more entrenched.
Avoiding the US in your portfolio?
Where does this leave investors? Walmart has underperformed the S&P 500 by 16% since its earnings call and the fallout is likely to spread. The old consensus dictates that when the US sneezes, the rest of the world catches a cold.
Only this time, this may no longer trigger an automatic global contagion. Maybe the rest of the world is more resilient. Maybe the US led expansion and collaboration is becoming less important. Deglobalisation and more insular policies have increasingly forged a new world order. This shifting landscape means that global countries and companies are actively learning to steer away from, or entirely around, the American market.
For portfolios, it means to basically aim to be durable, defensive and diversified, neither fleeing to cash nor chasing concentrated speculative returns. Most portfolios are sitting with far too many chips in the US basket, which leaves them exposed to a very narrow group of affluent consumers. It would involve actively moving capital toward global developed markets where valuations may offer a better cushion. Long-term outperformance frequently depends on layering in this kind of downside protection, via active diversification, before the broader market shift takes hold.
Sitting on the sideline and hoping this just blows over will likely result in getting drenched.
All data Bloomberg, unless otherwise stated.
Author: Matt Rowe, Managing Director Solutions.
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