Americans’ exposure to equities has reached unprecedented levels, with both households and pension funds holding more stocks than ever before a trend that is prompting economists and strategists to urge caution, even as markets continue to climb.
According to recent Federal Reserve data, direct and indirect stock holdings – including those in mutual funds and retirement plans – now account for an all-time high of 45% of US households’ financial assets.
A report by Reuters highlighted that the share of equities in private sector defined contribution pension plans is approaching 70%, the highest in at least seventy-five years. That reflects a decades-long shift away from defined benefit plans toward DC plans, where employees shoulder more investment risk.
This evolution in retirement savings has fundamentally altered the landscape for investors. As noted by Reuters, DB plans, which once dominated the US pension system, typically favored bonds to match long-term liabilities. Today, nearly 80% of US pensions are defined contribution plans, and these are far more likely to be equity-heavy, as individuals seek higher returns and are less constrained by liability matching.
The increased popularity of 401(k)s and other stock-based retirement vehicles has helped drive this trend, alongside a broader surge in direct participation in the stock market. As a result, the equity market’s influence on the broader economy has grown, for better or worse.
“The impact of a stock market melt-up or a meltdown – it goes both ways – is going to be much more impactful across the economy than, say, just a decade ago,” Jeffrey Roach, chief economist at LPL Financial told CNN.
The risks are not limited to American households. Foreign investors’ share of US stocks also hit a record high in the second quarter, further amplifying the market’s reach and potential volatility.
History suggests that record levels of stock ownership can increase the risk of a downturn and the potential for below-average returns.
“Investors shouldn’t expect the same magnitude of returns that we’ve seen during the last decade to repeat,” said Rob Anderson, US sector strategist at Ned Davis Research. “Going forward, over the next 10 years, there’s probably going to be a downshift in returns.”
Despite these warnings, equities have continued to outperform bonds by a wide margin. As of August, the S&P 500’s trailing one-year annualized return was nearly 16%, compared with just over 3% for the Bloomberg aggregate bond index, according to Truist Advisory Services. The performance gap is among the widest seen in the past seventy years.
The outlook for bonds remains uncertain. The near forty-year bull market in bonds appears to have ended, with inflation concerns and rising federal deficits weighing on fixed income markets. As a result, bonds are no longer viewed as the “risk-free” asset they once were, and some investors may be less inclined to shift away from equities as they approach retirement.
That's not to say stocks are a free lunch. Morgan Stanley Wealth Management notes that while the S&P 500's nearly 90% advance is impressive, it appears very removed from current debates about employment, inflation, and monetary policy – and more tied to AI.
"Since ChatGPT’s launch, AI data center-ecosystem stocks have accounted for roughly 75% of S&P 500 returns, 80% of earnings growth and 90% of capex growth," said Lisa Shalett, managing director and CIO at Morgan Stanley Wealth Management. "While most bullish outlooks are premised on economic reacceleration, it’s difficult to ignore the market’s reliance on AI capex."
While there is no clear sign of an imminent correction, the high allocation to equities is a trend that risk-minded advisors would be wise to watch closely.
“High allocations to equities don’t necessarily mean another major correction in the stock market is imminent,” said John Higgins, chief markets economist at Capital Economics. “But high allocations to equities may be flagging trouble ahead.”
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