Interesting insight

The three-week war in Iran is now 3.5 months, and there is zero consensus among people that I pay attention to as to when it will end. The Strait of Hormuz has been closed for weeks. As noted last week, Treasuries now come with an asterisk. China is building production capacity designed to permanently close the door on Western industry in thirty critical sectors. And the S&P 500 is up 17% in four weeks. If you find that paradoxical, you are paying attention. If you find it reassuring, you have not been paying attention. If you find it instructive, welcome to the world Ed Yardeni described at SIC.

Despite everything we have seen in the economic data, which can be confusing, the US consumer has refused to crack. My friend Dr. Ed Yardeni, whom I have known since ’98, has the most compelling explanation I have heard for why. He came to SIC Day 4 with an upgraded S&P 500 target, a bullish earnings case, and an explanation for one of the most confounding data puzzles of the current cycle. He has been right more often than not over those decades, which is why I pay attention when he speaks. (For the record, he has been bullish for the entire last 15 years, and expects the bull market to continue through the rest of the decade. He has been more than right over that timeframe.) But on the consumer, here is the puzzle he laid out, and it is one I have been turning over myself:

In April alone, disposable personal income fell while consumer spending rose. The bears say that cannot last. Ed says they are measuring the wrong thing. Every permabear in the business has been pointing at that gap for two years and calling it a ticking clock. Yet Ed’s answer is it is not a gap. To him, it is the G-shaped economy.

The G-Shaped Economy

The G stands for generational. Baby boomers, collectively sitting on $89 trillion in net worth (that is not a typo) are retiring in historic numbers. (Research shows that humans simply don’t understand the difference between a million, billion and trillion. There is an excellent Wall Street Journal piece on that.)

In 2025 alone, 1.85 million additional retired workers filed for Social Security for the first time. As they leave the workforce, they stop earning paychecks. That drags disposable income lower and depresses average hourly earnings. So, the income data looks weak. But consumption stays strong.

Ed explains it this way:

“What I see when I look around with the baby boomers is I see all my friends retiring… The boomers are doing absolutely great. If they’re still working, they’re making a lot of money in salaries. If they’re retiring, they’ve got $89 trillion of net worth collectively. As they retire, guess what? They’re not getting the paycheck anymore.”

Nearly one in five adults ages 25 to 34 are living in a parent’s home today, a number that bottomed at 8% in 1980 and has more than doubled since. We are back to levels not seen since before World War II. Not necessarily because they want to be there. In many cases, because they cannot afford not to be. An affordability crisis has squeezed younger generations, and the boomers are quietly filling the gap supporting their adult children. Helping with the grandchildren. Drawing down the $89 trillion.

Source: Pew Research Center

“How could consumption possibly exceed disposable income? Well, there’s $89 trillion of net worth and all these kids who are facing an affordability crisis… It’s not a good thing. I don’t like seeing it. It would be much better if we didn’t have an affordability crisis, but the way we’re getting through it is I think the boomers are helping their kids.”

Think about what that means in practice. When your 28-year-old is living rent-free and you are covering their bills, that money does not disappear. It flows straight into consumption. The boomer’s balance sheet becomes the younger generation’s spending power.

This is not a consumption bubble. It is an intergenerational wealth transfer that standard economic models miss because they measure income, not assets. The K-shaped economy that everyone describes is real but incomplete. The G-shaped economy explains why the consumer keeps surprising to the upside even as the income data looks grim. The bears have been right about the income numbers for two years. They have been wrong about the conclusion.

Ed is right. This is a natural outcome of the baby boom and the extraordinary economic times we’ve been privileged to live in. It’s not just that baby boomers are retiring. When they actually do retire, their income goes away and obviously is not in the BLS statistics on income. That is not a bad outcome as it is precisely what the boomers have planned. They saved, paid into Social Security and pensions, and now they are living on whatever wealth they accumulate.

However, the wealth doing the work of keeping consumer spending up is not evenly distributed. It sits overwhelmingly with older Americans who spent four decades benefiting from rising home prices, rising stock prices, and falling interest rates. The bottom 50% of Americans hold almost nothing by comparison. That gap may be the single most important reason the consumer has remained stronger than the income data suggests.

The bottom 50% of Americans hold roughly $9 trillion in assets. The top 10% hold well over $100 trillion. That is a canyon sized gap.

Source: Board of Governors of the Federal Reserve System

The gap is real. But it is not permanent. Boomers are not immortal. A portfolio is not a paycheck. When the wealth transfer slows, as it eventually must, the consumption engine that has been confounding the bears for two years loses its fuel. Ed is not saying the consumer is permanently fine. He is saying the consumer is fine for longer than the income data suggests.

Ed also noted something important about earnings breadth. More than 85% of S&P 500 companies are currently seeing forward earnings rise on a year-over-year basis. The market has broadened significantly, and earnings are on track for 23 to 24% growth this year, a number you usually only see coming out of a recession. That kind of breadth, sustained through a hot war and a closed strait, is either a sign of remarkable resilience or a market that has simply stopped paying attention to risk. Ed thinks the former.