The World Depends On Wealth Effects

By Carl Tannnenbaum

We just closed another banner year for asset prices. The S&P 500 was up 16% in 2025, and many overseas exchanges saw gains of more than 25%. Bond prices rose, and most housing markets held onto high values. There were even some signs of recovery in commercial real estate.

This has generated a lot of wealth, and a lot of what economists call wealth effects. The concept is simple: people whose net worth is rising tend to spend more. Calculations from Moody's suggest that U.S. consumers will spend an extra five cents for every incremental dollar of equity gain, and an extra seven cents for every dollar of appreciation in the price of their home.

Over the past two years, U.S. households have seen their financial assets rise by $19 trillion and their home values increase by $4 trillion. Applying the wealth effects cited above, these conditions would increase personal consumption by more than $1 trillion. This would be enough to boost U.S. economic growth by 0.5% per year, a substantial increment.