That’s because higher asset prices are spurring consumers to spend more freely than before, and consumption represents about 70% of GDP. In fact, this so-called wealth effect has become more potent in just the last 15 years.

Today, every 1% increase in stock wealth translates to a 0.05% uptick in consumer spending, according to a note last week from Oxford Economics lead U.S. economist Bernard Yaros.

In other words, a $1 increase in stock wealth leads to a $0.05 marginal propensity to consume, up from less than $0.02 in 2010. Meanwhile, every $1 increase in housing wealth leads to a $0.04 bump in consumption, up from $0.03.

“As households see their wealth rise, they turn more sanguine about their personal financial situation and are more inclined to loosen their purse strings,” Yaros wrote. “Increases in wealth will also propel spending by allowing homeowners to extract more equity from their houses or to liquidate appreciated stocks to fund their current consumption.”

He sees the wealth effect sending the marginal propensity to consume even higher in the coming years because retirees will comprise a bigger share of the population.

Given that they already enjoy a bigger net worth than younger generations do, retirees will rely more on their wealth to support consumption after they stop working and earning an income, Yaros explained.

On top of that, the ubiquity of digital media means consumer sentiment reacts even quicker to market news, reinforcing these wealth effects, he added.

This more powerful wealth effect could help explain why consumer spending has stayed resilient. Even as President Donald Trump’s trade war has kept inflation sticky and made businesses more nervous about adding workers in an uncertain landscape, AI is still propelling the stock market to new record high after record high.

At the same time, the stock market has grown more dependent on AI-related stocks, such as chip leader Nvidia along with so-called hyperscalers like Microsoft and Google.

Based on his wealth-to-spending math, Yaros estimated that stock market gains in the last 12 months from the tech sector alone will boost annual consumption by nearly $250 billion, which would account for more than 20% of the cumulative spending increase.

“While the stock market is not the economy, the latter risks greater whiplash from the ups and downs in the
former,” he wrote.

Analysts at JPMorgan also looked at the the link between the AI boom and consumers in a note last month. They estimated U.S. households gained more than $5 trillion wealth in the last year from 30 AI-linked stocks, raising their annualized level of spending by about $180 billion.

That represents just 0.9% of total consumption, but JPMorgan noted that it could go higher if AI spurs gains in a broader array of stocks or in other assets like real estate.

And stocks are not limited to wealthier Americans either. A survey released last month from the BlackRock Foundation and Commonwealth showed that over 54% of Americans earning $30,000-$79,999 a year are retail investors in the capital markets. And more than half of that cohort began investing in the past five years.

To be sure, the wealthiest still spend the most dollars, and the emerging K-shaped economy has magnified their impact. Research from Moody’s found that the top 10% of earners accounted for half of spending in the second quarter, a record high.

Michael Brown, senior research strategist at Pepperstone, attributed that to the wealth effect from stock and real estate gains as well as from income disparities.

“Tying all this together produces two things — an economy increasingly reliant on discretionary spending among higher earners, and higher earners whose discretionary spending is reliant on risk assets remaining buoyant,” he said in a note on Tuesday.

This dynamic means central bankers at the Fed who control monetary policy and lawmakers in Congress who control fiscal policy have a greater incentive to support the stock market, Brown added.

That’s because the wealth effect can work in the reverse direction, meaning falling assets prices will slow spending and the economy.

“What we have, then, is an economy that’s tied increasingly closely to the fortunes of the equity market, and an equity market that’s increasingly tied to overall consumer spending, which coupled together result in stronger ‘put’ structure to backstop risk assets, with fiscal stimulus continuing, and monetary backdrops becoming looser,” he said.

Major AI music-related news just keeps rolling in.

Universal Music Group has now entered into a strategic alliance with Stability AI to develop “next-generation professional music creation tools.”

UMG said that these tools will be powered by “responsibly trained generative AI and built to support the creative process of artists, producers and songwriters globally”.

According to the announcement today (October 30), through this alliance, Stability AI’s research and product teams will “work closely with UMG and its artists to research artist needs and technical approaches for the next generation of music creation tools”.

It added: “Together, they will explore new recording and composition concepts, gather insights into artists’ needs, and better understand how artists adopt and engage with these technologies.”

The news marks Universal Music Group’s second significant AI music-making-related partnership in as many days. On Wednesday (October 29), UMG revealed that it has settled its copyright infringement lawsuit against AI music platform Udio. The companies also agreed to collaborate on a new platform featuring licensed AI music, slated to launch in 2026.

Stability AI, known for its Stable Diffusion image generator and Stable Audio AI music model, will work with UMG’s research and product teams to build software trained on licensed music catalogs.

The partnership with Stability AI will put UMG artists directly in the development process, gathering feedback on what creators need from AI-powered recording and composition tools, and “better understand how artists adopt and engage with these technologies.”

Through feedback with creators, UMG and Stability AI aim to create “fully licensed, commercially safe AI music tools” that “supports both artists and rightsholders while preserving the integrity of the art form”.

Stability AI claims to be “the industry leader in commercially safe generative audio”. It said that its “Stable Audio family of models was built specifically for professionals and trained exclusively on licensed data to support responsible, high-quality music and sound generation”.

Commenting on the deal with Stability AI, Michael Nash, Chief Digital Officer & EVP, Universal Music Group, said: “This agreement is an extension of our fundamental orientation that our artists and songwriters are the cornerstone of our business.

“With AI, as with everything else we do, we start with what best supports our work to help them achieve creative and commercial success and build from that foundation to forge new and better commercial and creative opportunities.

“This agreement is an extension of our fundamental orientation that our artists and songwriters are the cornerstone of our business.”

Michael Nash, Universal Music Group

Added Nash: “And as we’ve made abundantly clear, we will only consider advancing AI tools and products based on models that are trained responsibly. We’re looking forward to working with Stability AI to deeply integrate AI tools development with the vision and creative ambitions of our artists and to the results and rewards this initiative offers to all.”

Prem Akkaraju, CEO of Stability AI, added: “UMG has long been a leader in technological innovation in music. This partnership marks the next chapter of music creation.

“At Stability AI, we put the artist at the center and build AI around their unique needs because real transformation has always come from a combination of art and science.”

“UMG has long been a leader in technological innovation in music. This partnership marks the next chapter of music creation.”

Prem Akkaraju, Stability AI

UMG says its deals with Udio and Stability AI are among the “industry-first AI-related agreements” that it has struck with companies including YouTube, TikTok, Meta, KDDI, KLAY Vision, BandLab, Soundlabs and Pro-Rata, among others.

For Stability AI, the UMG deal follows its recent strategic partnership with Electronic Arts to develop generative AI tools for game development and with marketing firm WPP for advertising applications. The UMG deal extends its strategy into music production.

In July, Akkaraju told the Financial Times in an interview that Stability AI is looking at developing a marketplace where artists can license their work for AI training. The marketplace would reportedly allow creators to voluntarily submit artwork and receive compensation when AI companies use their content for model training.

Stability AI is currently facing multiple copyright infringement lawsuits. In one case, Seattle-based Getty Images sued Stability AI in both the UK and the US, alleging that the company illegally used 12 million images without permission or compensation.

Separately, illustrators Sarah Andersen, Kelly McKernan, and Karla Ortiz filed a class action lawsuit in January 2023 against Stability AI and two other companies, challenging the use of their works for AI model training.

In August, Stability AI researchers said AI is creating “potentially new” music genres. “Before, musicians had to dedicate years to learn a specific genre. Now, AI can blend and produce music in multiple (and potentially new) genres,” the researchers found.

Music Business Worldwide

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