(Bloomberg) — Wall Street traders this week were hit by the biggest cross-asset losses since the Federal Reserve’s monetary-tightening campaign peaked in 2023. Blame tariffs, softening growth, a potentially revitalized Europe, and more.
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Bulls, with their brokerage balances shrinking, hope it turns around. Also eyeing the turmoil warily is a small but vocal cohort of market watchers worried about its implications for the economy.
At issue is the outsize role market gains have played in Americans’ sense of prosperity in recent years, helping buttress consumption. Equity holdings made up 64% of US households’ financial assets last year, a record, Fed data show. Most of it is held by the biggest spenders.
Known as the “wealth effect,” people with money in the market tend to open their wallets when assets are buoyant — and do the opposite when they’re stressed out. While the scale of the losses may not be cause for panic just yet, the speed of the plunge is eliciting reminders that markets themselves have the power to cause economic trouble should they continue to crater.
“The stock market is good at forecasting the future because it helps create it,” said Leuthold Group’s chief investment officer, Doug Ramsey, a three-decade Wall Street veteran whose core investment fund is ahead of the S&P 500 this year. “We doubt this economic expansion can survive a stock market correction of more than 12-15%.”
In today’s top-heavy business cycle where the richest 10% American households make up almost half the country’s consumer spending — and own half the stock, around $23 trillion worth — the threat posed by waning market wealth is a real one, according to Mark Zandi, chief economist at Moody’s Analytics. He estimates that for every $1 decrease in net worth, consumer spending ultimately declines by 2 cents.
That’s a dispiriting figure, given $3.7 trillion was erased from stocks in the last few weeks, just as consumer spending is slowing and data from housing to the labor market has shown signs of weakness.
“There is a very strong link between the stock market — its ups and downs — and the strength of consumer spending and the economy,” Zandi said. “If the stock market comes right back like it has in recent selloffs or recent corrections, then no harm, no foul. But, if the market stays down, it’s going to diminish consumer spending then it ultimately will derail it.”
While S&P 500 edged up Friday and has yet to reach the worrisome threshold cited by Ramsey — it’s down 6% from its giddy peak — months of market peace have abruptly blown up in a matter of days. Volatility has surged in equities, corporate bonds, currencies, and more. That is stirring questions on whether stress on Wall Street will sow discomfort among asset-owning consumers. And it’s the latest wild card in an economy whose outlook is already clouded by unknowable outcomes around tariffs and government firings.
This week saw the volley of confusing tariff-related announcements taken to a whole new disruptive level, causing a plunge in market sentiment and a Wall Street backlash. Fed Chair Jerome Powell said Friday that officials don’t need to rush to adjust policy amid increased uncertainty in the economic outlook, even as bond traders have boosted their wagers on rate cuts.
Stocks posted their worst week of 2025 by far, with the Nasdaq Composite Index briefly entering a 10% correction. With major ETFs tracking stocks, Treasuries and corporate bonds falling an average 2%, the market endured the worst across-asset selloff since October 2023.
The equity plunge is particularly unsettling. The rise in US total net worth since 2022 has been almost entirely driven by their stock holdings as technology shares led the equity boom amid frenzy over artificial intelligence. Excluding that factor, net worth by American households would have been broadly flat over the period, according to data compiled by Kaixian Tan, an analyst at Gavekal Research. A falling stock market may force Americans to save more when housing remains highly unaffordable, he warns.
“I’m not too worried about the current growth,” Tan said. “I am, however, worried about the overvaluation of US equities and the potential for ‘better stories’ outside of the US leading to a simultaneous fall in US equities and US dollar. If this happens, this may eventually lead to a growth slowdown.”
Another variable to consider: Pain in speculative market corners is getting hard to ignore. A slew of so-called altcoins and leveraged ETFs tied to single stocks like Tesla Inc. — get-rich-quick trades typically beloved by young and inexperienced investors — have in some cases slumped more than 50% this year.
“For those who arrived late, what they’ve experienced isn’t a setback, but a traumatic financial event,” said Peter Atwater, president of research service Financial Insyghts.
While a tiny pot of money next to bonds and stocks — digital assets had a nominal value of $3.7 trillion at their peak — crypto and its volatile cousins are the province of an especially flamboyant cohort of spenders. That’s been particularly the case in real-estate markets in California and Nevada, according to a study last year. Researchers found that a dollar of unrealized crypto gains led to a 9-cent increase in its owners’ expenditures.
The good news is that consensus estimates point to continued economic growth, even as they have been pared. After marking up their growth projections persistently since September, economists just trimmed the 2025 forecasts, with the median falling by 2 basis points to 2.28% — a slight but notable shift in momentum.
Ed Yardeni, the famous economist, says it’ll take a lot more than what’s happened in markets of late to derail US GDP — and he’ll only start to worry should the S&P 500 get nearer to a 20% decline. Such retrenchments preceded or coincided with the start of a recession in 11 out of the previous 15 cycles, data compiled by Bloomberg show.
“A bear market in stocks and much lower home prices likely would lead consumers and businesses to pull back some of their spending,” wrote the founder of Yardeni Research Inc. “But that would be likely only in a recession, which we see as improbable at the moment.”
(Updates with data on equity holdings in third and sixth paragraphs; expands Ramsey comment in fifth paragraph and Zandi comment in eighth.)
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