How Long Can a Small Number of Wealthy Hold Up the Market?
When it comes to the consumer, it's a tale of the haves and have nots, and here's what the investor must ask.
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As I edge closer to 60, I am finding myself being more reflective. Looking back, I realize how fortunate I was to start both my investing and professional career in the mid-1980s. Back then the price-to-earnings on the S&P 500 was in the low teens and interest rates were in the early innings of their multi-decade decline. Given those tailwinds, it was hard not to be a successful investor regardless of whether you chose stocks or bonds.
Professionally, I also had the wind at my back in the last 15 years of the 20th century. Baby Boomers were in their peak earnings years, debt was relatively low, and the political environment was much less dysfunctional and growth oriented. The economy was booming through most of this time as well. Gross Domestic Product rose more than 4% annually from 1996 to 1999 and the federal government had small fiscal deficits and even ran a surplus in 1999.
Growth was also more shared as a rising tide lifted most boats. There was simply less wealth inequality. Of course, that was before China was fully welcomed to the global trading community, which over time decimated a good portion of the blue-collar workforce. It might prove ironic if the AI Revolution ends up having similar impacts to the white-collar population in the years ahead. Time will tell.
You can see how bifurcated society has become by looking at wealth disparities. The top 10% of American households now own seven-eighths of all stock wealth and account for 50% of consumer spending. This has resulted in a very bifurcated consumer market, and an investor should be fully aware of this.
You can see this bifurcation throughout the economy. Take home builders. Mass market names like D.R. Horton DHI and Lennar LEN are feeling year-over-year revenue declines in the mid to high-single digits. Lennar’s most recent quarter showed it had to use incentives like mortgage rate buydowns and free upgrades totaling just over 14% of revenue in order to move its inventory. This is the highest incentive level of incentives the company has had to provide since 2009, when the country was going through a full-blown housing bust.
Lennar’s gross margins in its most recent quarter shrunk 500 bps from the same period a year ago to 17.5%. This is down from a peak gross margin of 29.2% three years ago when the housing sector was experiencing boom times following the pandemic. Meanwhile, over at luxury homebuilder Toll Brothers TOL, with an average home price more than 150% above that of D.R. Horton and Lennar, things are going much better. Revenue in Toll’s latest quarter showed six percent year-over-year growth. Gross margins are also still above 25%.
You can find the same discrepancies in retail, travel and other sectors of the consumer economy. The struggles by the majority of consumers are also why consumer confidence and sentiment readings are quite dismal right now. As an investor, one also must ask how long a very small number of consumers can keep the American economy afloat, especially with the jobs markets faltering and loan delinquencies rising? My gut tells me that question might be answered in the negative at some point in 2026.
At the time of publication, Jensen had no position in any security mentioned.
