In theory, the impact that disposable income has on the stock market is that a widespread increase in disposable income leads to increases in stock valuations and, therefore, increases the overall value of the stock market.
Disposable income is defined as the total amount of household income that's available for spending and saving after paying income taxes.
If disposable income increases, households have more money to either save or spend, which naturally leads to a growth in consumption. This increase in consumption could increase corporate sales and corporate earnings, increasing the value of individual stocks. This increase in individual share price valuations could then lead to a market-wide increase in value. This potentially leads to an economic boom.
The opposite also holds true. If disposable income decreases, households have less money to spend and save, which then forces consumers to consume less and become more frugal. This decrease in consumption could then decrease corporate sales and corporate earnings, decreasing the value of individual stocks. This decrease in individual share price valuations could then lead to a market-wide decrease in value. This potentially leads to depression or recession.
Increases in disposable income don't always result in an increase in the value of the stock market, and vice versa.
Sometimes, especially in the wake of a recession and during a recovery period, although disposable income increases, many consumers remain frugal and do not use the increases in disposable income to increase consumption. When this occurs, even an increase in disposable income can lead to a recession since, as of 2015, over 70% of U.S. GDP is accounted for by consumption.