Historic gains in the stock market have padded Americans’ nest eggs, but economists warn the growth isn’t without side effects.

According to the Commerce Department, U.S. investors earned a whopping $3.7 trillion from interest and dividends in the first quarter. That's $770 billion higher than four years ago when the economy went under lockdown.

The recent gains were driven by an uber-bullish stock market, with the S&P 500 soaring 10% in the first quarter.

At the same time, investors are earning higher interest payments from their U.S. Treasury holdings thanks to the Fed’s aggressive rate hikes in 2022 and 2023.

This newfound wealth means wealthier households can better absorb inflation and keep the economy humming along, which can complicate the Fed's plans to lower interest rates.

According to James Marple, a senior economist at TD Bank, this “is going to make it harder for the Federal Reserve to reach their inflation target.”

Although the Fed’s inflation fight is far from over, investors are betting on multiple rate cuts this year. If history is any indication, the mere expectation of a rate cut could propel stocks higher, further contributing to inflation.

“That complicates things,” Marple said.

Of course, not all Americans immediately benefit from the wealth effect. Millions have their assets locked up in long-term 401(k)s, while others are woefully underrepresented in the wealth distribution.

In an economy where policymakers seemingly prioritize healthy markets over lower consumer prices, these Americans are left holding the bag.

Uneven wealth distribution

The top 1% of Americans own 54% of stocks and more than one-fourth of all household wealth. In the fourth quarter alone, this demographic earned a jaw-dropping $2 trillion, driven entirely by stock gains.

“The U.S. stock market is where major wealth gains have been achieved,” said Chuck Collins, a director with the Institute for Policy Studies.

And that wealth feeds into consumer spending.

As Moody’s chief economist Mark Zandi noted, Americans who “own the bulk of the stock holdings account for approximately two-thirds of consumer spending.”

That means wealthy Americans contribute more to inflation without suffering from its side effects.

That’s why some experts say the Fed’s attempt at a “soft landing,” or a coordinated cooling of inflation and the economy, is mostly a farce for the middle class.

“Soft landing means the top 1% gets record stock prices while you get stuck with the most unaffordable housing market ever, permanent price increases & record credit card debt,” said Sven Henrich, market analyst and founder of Northman Trader.

“But you get to keep your job and have to work longer to pay it all off.”