As the S&P 500 ends above 6,400 for the first time, here are a few reasons for caution

Consumers aren’t yet paying higher costs associated tariffs for things like a new roof or kitchen, says a lender. That could change next year. - Getty Images

The stock market surged to a fresh record high on Tuesday after consumer prices edged up slightly in July, with the S&P 500 index SPX ending above 6,400 for the first time in history.

Gradual price increases in July gave investors more confidence around the Federal Reserve’s ability to cut interest rates in September, which could help insulate the economy from President Donald Trump’s tariff fight.

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Yet a growing concern has been that tariff shocks still lurk on the horizon. Should that happen, higher prices could clamp down further on consumer spending — the economy’s biggest driver.

“I am losing sleep based on the unknowns around tariffs,” said Mike Petrakis, founder and chief executive at PowerPay, a fintech home-improvement lender that expects to do $5 billion to $6 billion in originations this year, which would be a record for the company.

While inflation has been hitting lower-income homeowners harder than wealthier clients, Petrakis said consumers replacing a roof or remodeling a bathroom still aren’t yet seeing tariffs resulting in higher prices for projects.

That’s because big national contractors on PowerPay’s platform have been able to absorb those costs for now, taking a modest hit to their margins, according to Petrakis.

However, he expects consumers to see prices on home-improvement projects to be reset next year, though he hopes instead that “tariff noise goes away” in six months.

See:There’s ‘no evidence’ of tariff inflation, top Trump aide says. Is he right?

Stocks surge, inflation climbs

PowerPay, which started lending in late 2019, has been in the unique position of benefiting from a boom in home improvements since the pandemic.

As home prices skyrocketed during the COVID crisis, owners with ultralow 30-year fixed mortgage rates started taping into the trillions of dollars in new home equity to fix up their homes. But like other businesses, those projects also hinge on the ability and willingness of consumers to keep spending.

“So far, many businesses have managed to soften the impact of rising costs by relying on pre-tariff inventories, utilizing trade zones and accepting slimmer profit margins,” said Lydia Boussour, a senior economist at EY-Parthenon, in a Tuesday client note.

The consumer-price index rose 0.3% in July, increasing less than expected. It was steady at 2.7% on a yearly basis.

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Read:Key inflation rate shows biggest rise in 6 months, CPI shows, but Fed rate cut still appears in play

Still, when tariff “buffers gradually fade, inflation will likely intensify in the coming months,” Boussour said, adding that her team expects yearly headline and core CPI inflation to near 3.2% by year’s end — “entirely a function of the administration’s tariff-centric trade agenda.”

What’s priced in?

Consumers getting hit with higher costs from tariffs could set up investors for trouble.

“If things get too quiet, even the tiniest little thing could cause volatility to spike or cause the equity market to get hurt,” said Joe Ferrara, an investment strategist at Gateway Investment Advisers, which manages low-volatility equity strategies.

While he thinks companies have grown more cautious, including by lowering their guidance in light of Trump’s tariffs, a reckoning for households looks likely.

“I still don’t think the consumer has fully felt the brunt of all the tariffs,” Ferrara said Tuesday. Paying a dollar more for bunch of bananas might be manageable, he said, but anyone needing to buy a big-ticket item, like a new washing machine or a car, could face paying hundreds of dollars more, due to tariffs, he said.

“That’s a big impact,” he said. “The next year or so could be really interesting for the consumer, if we still stay in this kind of inflation picture.”

See:Ford warns its tariff hit will grow to $2 billion, offers downbeat guidance

The S&P 500 and Dow Jones Industrial Average DJIA both added 1.1% on Tuesday, while the Nasdaq Composite Index COMP gained 1.4% and Wall Street’s Cboe Volatility Index, VIX or “fear gauge,” tumbled more than 9% to 14.73, its lowest close since Dec. 26, according to FactSet.

So who is spending?

A fresh look at spending patterns by U.S. income groups shows the highest earners have been driving growth in the wake of the pandemic, almost by themselves.

Researchers at the Federal Reserve, in a July paper, found that high-income households earning at least $100,000 a year continued to spend
strongly since mid-2021, while spending by low- and middle-income households lagged through the end of 2024.Spending has stalled out for low-income earners. - Federal Reserve

“We’ve just got this huge bifurcated economy right now,” said Byron Anderson, head of fixed income at Laffer Tengler Investments, noting that U.S. corporations may be doing well, but lower-income earners already looked tapped out when it comes to spending.

Anderson thinks corporations can handle “eating” tariffs for now, but that they eventually would lead to lower growth and lower earnings.

Rate cuts from the Fed could help, especially if another weak jobs report causes panic and results in a few jumbo-sized rate cuts. Still, Anderson worries it still might be too late to save the broader consumer.

Petrakis, the CEO at PowerPay, thinks Fed rate cuts could help, but that the 30-year fixed mortgage rate still would need to drop to around 5.5% to spur a fresh refinancing wave, a level last seen in 2022.

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As the S&P 500 ends above 6,400 for the first time, here are a few reasons for caution

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