Don’t Forget to Say Thank You

<June 11, 2026>

For nine consecutive weeks, we’ve turned on our computers each morning to find the same headline preparing investors for higher equity prices.

With stock valuations already at nosebleed levels, the major indexes continue to hit records. I mentioned to Jayme last week that all this market is missing is the sound of slot machines.

While there are many similarities between today’s market and a casino, there’s one important difference. In a casino, the odds are stacked against gamblers. In this market, speculators are encouraged to keep rolling the dice with the belief that their bets will be backstopped by the house—or the Federal Reserve.

During recent earnings calls, executives have been quick to take credit for better-than-expected operating results, often pointing to effective strategies, strong execution, and competitive advantages. Rarely do companies give thanks to one of the most important drivers of today’s operating environment: a soaring stock market and record household wealth. Companies can strategize all they want, but without the tailwinds of asset inflation and extraordinarily loose financial conditions, the economy and corporate earnings would look considerably different.

With the stock market soaring, many of the businesses we follow are increasingly focused on affluent consumers. According to the Financial Times, the top 10% of income earners now account for nearly half of all consumer spending. As a result, companies continue to push premiumization by offering higher-end products and services.

MasterCraft, a market-leading manufacturer of recreational boats, recently raised guidance after generating better-than-expected results. Management credited “disciplined execution across the business and continued new product momentum.” Missing from the list of contributors was the booming stock market, which has allowed wealthy customers to trade in their paper profits for new powerboats. Meanwhile, the company’s pontoon business, which caters more to middle-class consumers, continues to face cautious demand and heavy promotional pressure. Management noted the market continues to “lean premium” as middle-income consumers struggle.  

The airlines are also implementing a similar strategy, prioritizing higher-margin seats and premium customers over main-cabin passengers. On a recent conference call, Delta’s CEO noted that higher-end consumers appear immune to the headlines and continue to spend “in the experience economy.” The headline most likely to derail Delta’s premium strategy might read: “Market Crash Leaves Premium Seats Empty.”

The same trend is apparent in the automobile industry. A recent Wall Street Journal article noted that U.S. vehicle production is running at 16 million units annually, down from 17 million before 2020. Automakers are focused on selling high-margin trucks and SUVs rather than larger volumes of more affordable vehicles. For consumers experiencing sticker shock after visiting their local dealers, we do not expect this “Make Less Make More” strategy to reverse anytime soon.

Ralph Lauren recently reported another strong quarter, with sales increasing 17%. The company reported a 16% increase in average unit retail (AUR), driven by reduced discounting, favorable mix, and price increases. Management attributed its strong results to the power of its iconic brand and its ability to connect authentically with consumers. As long as asset prices keep rising, we expect Ralph Lauren will continue to raise prices, expand margins, and benefit from high-net-worth spending.

Toll Brothers raised full-year guidance after reporting another strong quarter. The company credited its position as America’s luxury homebuilder and the strength of its team. Management boasts that their business continues to perform well even in a difficult environment. With the S&P 500 trading at 42x normalized earnings (Shiller P/E), 3.6x sales, and reaching record highs nearly daily, we would not describe the environment supporting Toll’s affluent customer base as difficult. Quite the opposite. We suspect demand for million-dollar homes is highly correlated with financial asset prices. 

Even companies that traditionally sell to middle- and lower-income consumers are making the shift to premiumization. In Walmart’s most recent quarterly earnings call, management noted that its U.S. Marketplace business grew 50%, reflecting stronger participation from higher-income households. Dollar General discussed a similar trend, highlighting strong customer growth from households earning more than $100,000 annually. 

The more companies benefit from rising asset values, the more dependent their operating results become on them. This growing dependence also causes demand to be more fragile and vulnerable to sudden shifts in investor sentiment, as spending becomes increasingly tied to portfolio values. Despite this, management teams often present demand as durable and self-sustaining rather than acknowledging how much of it is being stimulated by elevated asset prices.

We also believe the link between asset inflation and consumer inflation remains underappreciated. The mechanism is straightforward. As higher-income households account for a growing share of spending, they are gaining greater influence over prices across the economy. Businesses are discovering that affluent consumers are generally more willing to accept higher prices, encouraging premiumization, higher margins, and higher consumer inflation.

In our view, the growing influence of affluent consumers on the price-setting process helps explain why inflation has remained above target and more persistent than many Federal Reserve members expected. Through our review of hundreds of earnings calls and operating results, we see clear evidence that asset inflation is influencing consumer behavior and corporate pricing decisions.

Despite the many real-world examples, we rarely hear policymakers acknowledge the connection. Supply chain constraints, labor shortages, tariffs, and energy shocks are routinely cited as inflation drivers. However, the spillover effects from loose financial conditions and asset inflation receive little attention. In our view, this neglect risks overlooking a significant and growing source of inflation. With financial conditions still loose and stocks in a raging bull market, asset inflation is likely to continue spilling over into the real economy, raising the odds of a sixth consecutive year of above-target inflation.

Loose financial conditions are inflating corporate earnings and consumer prices. With household net worth at record highs, a growing number of companies are benefiting from the affluent consumers’ ability and willingness to pay higher prices. Even so, many corporate executives continue to credit their success to strategy, execution, and other internal factors. Whether the credit belongs to ultra-easy monetary policy, loose financial conditions, or simply another stock market bubble, asset inflation has been a significant contributor to corporate operating results. Rather than taking all the credit, maybe a little gratitude is in order.

Eric Cinnamond

eric@palmvalleycapital.com

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Definitions:

S&P 500: (short for the Standard & Poor’s 500 Index) is a stock market index that tracks 500 of the largest publicly traded companies in the United States. It is widely considered one of the best indicators of the overall U.S. stock market and economy.

Wilshire 5000: a broad U.S. stock market index designed to measure the performance of virtually all publicly traded U.S. companies with readily available pricing data.

Average Unit Retail (AUR): a retail metric that measures the average selling price per unit sold.

Quantitative easing (QE): is a monetary policy where a central bank creates money to buy financial assets—usually government bonds—to increase liquidity and stimulate the economy.

Normalized Earnings: Normalized earnings are the earnings a business is expected to generate on average over a complete business cycle, smoothing out temporary cyclical highs and lows to estimate its sustainable earning power.

Shiller P/E: A cyclically adjusted price-to-earnings ratio. It is a valuation metric developed and popularized by Robert Shiller that compares a stock market index's current price to its average earnings, or normalized earnings, over a full business cycle.

Price to Sales: Price-to-Sales (P/S) is a valuation ratio that compares a company's market value to its revenue.

Market Cap to GDP: Market Cap-to-GDP is a valuation metric that compares the total value of a country's stock market to the size of its economy. How highly the stock market is valued relative to the economic output that ultimately supports corporate profits.

Corporate Profits to GDP: an economic ratio that measures how large corporate profits are relative to the overall size of the economy. The formula is: Corporate Profits/GDP.

GDP: the total market value of all final goods and services produced within a country during a specific period, usually a quarter or a year.