Monthly Economic and Market Summary

• Stocks Rally in April-April was a strong month for equity markets as the S&P 500 rallied 10.5% and the S&P 600 small-cap index rose 10.4% largely supported by solid earnings, AI-related enthusiasm and a risk-on tone from investors. Bonds were largely flat, as the Bloomberg Intermediate Govt/Credit Index rose 0.2%, as higher yields offset income returns

• AI Lifts U.S. Economic Growth –U.S. economic growth, as measured by gross domestic product (GDP), increased at a 2% annualized rate in the first quarter, led by strong AI-related business investment amid softer consumer spending. The report points to a resilient but uneven economy, with inflation, higher gas prices and geopolitical uncertainty likely keeping the Fed cautious

• Fed Split Highlights Rate-Cut Uncertainty–Later this month, Kevin Warsh is set to take over the Federal Reserve, facing a more divided backdrop, as Jerome Powell plans to remain on the board and several officials signaled caution on cutting rates. The debate reflects a more complicated inflation outlook, with higher energy prices, lingering tariff effects and underlying inflation near 3% making near-term easing less certain

• Consumer Confidence Tops Expectations– Consumer confidence surprised to the upside in April, with the Conference Board index rising to 92.8 versus expectations for a decline to 89. Despite pressure from inflation and higher energy prices, consumers reported improved views of the job market and future income, reinforcing signs that overall household demand remains resilient.

• ISM Manufacturing Holds Firm–The ISM Manufacturing PMI held at 52.7 in April, slightly below expectations for 53, but still signaling expansion because a reading above 50 indicates growing manufacturing activity. New orders remained in growth territory, while employment weakened and input costs rose sharply. Overall, the report points to steady factory demand but with inflation and supply-chain pressures still weighing on the outlook.

The K-shaped economy and market risk

The U.S. economy has become increasingly “K-shaped”, characterized by a growing divergence between higher and lower-income households in recent years. Higher-income households have seen their wealth surge owing to strong stock market returns coupled with rising home prices, while lower-income households have struggled with stubborn inflation, prohibitively expensive homes, household debt and higher health insurance costs.

An article from the Wall Street Journal highlighted the implications of the “K-shaped” economy. The chart below highlights the share of personal outlays by income group since 1990, showing that the top 20% of U.S. households now account for a striking 59% of total consumer spending. This leaves the U.S. economy susceptible to changes in their overall wealth, as consumer spending drives approximately two-thirds of the U.S. gross domestic product. The growing concentration of spending among higher-income households therefore represents not just a shift in who is spending, but a structural change in the drivers of economic growth.

The ongoing conflict in the Middle East and the rapid increase in oil prices disproportionately impact lower-income households. According to AAA data, regular fuel averaged $4.11 a gallon during April, up from March’s $3.67 average and continues to rise. Higher prices at the pump have likely negated some of the positive effects of tax refunds in recent months, weighing on overall consumer demand. Higher oil prices also threaten the asset values and confidence that have supported spending among higher-income consumers.

The “K-shaped” economy has important implications not only for economic growth but also for equity markets. A downturn in the stock market could mean a slowdown in spending by high-income households and a reversal of the “wealth effect”. The result is an economy that appears to be growing in aggregate but carries hidden risks beneath the surface.