We are increasingly seeing a narrower breadth of growth, says EY Parthenon’s Greg Daco
Speakers
Summary
Gregory Daco, EY Parthenon chief economist, discusses the narrowing breadth of U.S. economic growth, which is heavily reliant on affluent consumers, AI investment, and stock market gains. He warns that this fragility makes the economy and stock market vulnerable to shocks, while lower-income households struggle and consumer spending is propped up by savings and credit. Daco also notes the Fed is unlikely to cut rates and recession risks are rising, with GDP growth expected below consensus.
- U.S. economic growth is increasingly narrow, driven by three pillars: affluent consumers, AI investment, and stock market gains.
- Lower- and median-income families are struggling with high prices, while higher-income families continue spending.
- Real disposable income growth is only 0.4% year-over-year, but consumer spending is growing 2%.
- AI investment accounts for a significant portion of GDP and corporate capex, crowding out other sectors.
- The S&P 500 is approximately 50% levered to the AI theme, making it vulnerable to a shock.
- Equal-weighted consumer discretionary stocks have lagged, reflecting consumer weakness.
- Recession odds are around 40% over the next 12 months, with GDP growth expected to slow to 1.5-1.6%.
- The Fed is expected to maintain higher interest rates, with no cuts imminent even if jobs data weaken.
Trade Ideas
Broad market vulnerable to narrow pillars.
The U.S. economy is increasingly reliant on three narrow pillars: affluent consumers, AI investment, and stock market gains. This narrow breadth makes the economy and the stock market vulnerable to shocks. The S&P 500 is over-concentrated in AI (about 50% levered), so if any pillar weakens, a pullback is likely. The underlying economy shows fragility in consumer spending and income growth, making the broad market risky.
Consumer discretionary lagging; sustainability concerns.
Consumer spending is being sustained by drawing down savings, using credit, and wealth effects, which are not infinite. Real disposable income is growing only 0.4% year-over-year while spending rises 2%. Lower- and median-income families are struggling. Equal-weighted consumer discretionary stocks in the S&P 500 are already 9% below their high, lagging the overall index, indicating the market is pricing in weakness. This sector is unattractive given the unsustainable consumer backdrop.
