Key Takeaways
- The US economy is looking increasingly bifurcated—a phenomenon analysts describe as a “K shape.”
- Higher-income households have seen their wealth and confidence surge thanks to strong stock market returns, while lower-income households have struggled.
- That divide means the outlook for the economy is more precarious. A stumble in markets could mean a sudden drop in consumer spending and more sluggish growth.
The US economy is looking lopsided. A soaring stock market has boosted the balance sheets of high-earning households, which are in turn propping up consumer spending and economic growth. Lower earners, on the other hand, are pinching pennies.
Analysts say that imbalance creates a fragile, circular dynamic. A stumble in the markets could mean a slowdown in spending by higher earners, which could have ripple effects throughout the economy, including for stocks. “It’s almost like the stock market is the tail that’s wagging the dog of the economy,” explains Emily Roland, co-chief investment strategist at Manulife John Hancock Investments.
Overall, the growing divide between high and low earners “leaves the economy much more sensitive,” says Samuel Tombs, chief US economist at Pantheon Macroeconomics. High earners spend more on categories that are easier to cut out of household budgets if necessary, like travel and entertainment. “If you’ve seen strong growth in areas of discretionary spending, then households can pull back very quickly,” he says.
What Is a K-Shaped Economy?
The idea of a “K-shaped” economy comes from the two “arms” of the letter K pointing in different directions. The arm going up illustrates the good fortunes of higher-income households, which tend to be invested in financial markets. The stock market has been on a multi-year bull run, with the Morningstar US Market Index returning 26% in 2023, 24% in 2024, and 17% in 2025. Those blockbuster returns have boosted the balance sheets of the wealthy. Early last year, Moody’s Analytics estimated that the top 10% of US earners accounted for roughly half of consumer spending.
“We’ve seen these back-to-back-to-back double-digit returns for the market,” explains Manulife’s Roland. “That’s very unusual in and of itself, but it’s created this massive wealth effect that’s been concentrated in people who own stocks … That’s one of the primary drivers of this bifurcated economy.”
Pantheon’s Tombs says declining savings rates (even among high earners) is evidence that this cohort is propping up overall consumer spending. “It seems as if those high-income households have reduced the amount they’re putting aside because their stock market wealth is increasing quickly,” he says. “They just consume everything they earn.”
The arm of the K pointing down illustrates how lower-income households are faring. They are not seeing the same boosted wealth from the stock market and are contending with sluggish wage growth that hasn’t kept up with inflation. Elevated interest rates are also taking a toll, because they make borrowing (via mortgages, credit cards, auto loans, and other consumer products) more expensive. “That’s hurting the lower-end consumer that tends to have more leverage,” says Roland.
The Consumer Sentiment Divide
The divide is clear in surveys of consumer sentiment. Recent data from the University of Michigan’s consumer sentiment report—which measures how confident households are in their own finances and the path of the economy as a whole—shows that households with larger stock holdings are increasingly upbeat, while the opposite is true for households that own no stock.
“Sentiment surged [in February] for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings,” survey director Joanne Hsu said in a statement.
Slicing the data by income yields a similar result, with the top third of high-earning households displaying the highest confidence of any other cohort. However, Pantheon’s Tombs points out that the gap between high and middle- and low-income consumers has narrowed since 2024.
Meanwhile, retail sales data released Tuesday showed that spending over the holiday season was unexpectedly flat—a sign that spending is finally slowing alongside declining sentiment for all but the most affluent households. “Consumer momentum remains narrow and uneven, increasingly reliant on higher-income households, a greater willingness to borrow, and continued savings drawdowns,” EY-Parthenon chief economist Gregory Daco wrote.
The bifurcation within the economy could be magnified by tax refunds coming this spring that were boosted by last year’s tax legislation. Bank of America US economist Aditya Bhave expects middle- and higher-income households to be the biggest beneficiaries, meaning “‘K-shaped’ spending dynamics could become more pronounced,” as he wrote in a note to clients last week.
Why the K-Shaped Economy Poses a Stock Market Risk
Analysts say this trend puts the economy in a precarious position. Recent consumer spending growth “does feel quite fragile,” says Tombs. He thinks that declining savings rates among high-income households foreshadows a likely tightening of spending even within that group this year.
That spending is also contingent on the stock market. “Because the wealth of these top households is closely tied to stock market performance, their consumption patterns are increasingly influenced by the market’s performance, rather than traditional income growth,” Lisa Shalett, chief investment officer of Morgan Stanley’s wealth management arm, explained last year.
“If you see that higher-end consumer less confident about their wealth, you may see some type of pullback in consumer spending, and then that transfers into corporate profits,” says Roland of Manulife. Profit losses mean compressed margins and poorer earnings, which could mean poorer returns for equities. “It’s all tied together,” Roland says, though she notes that she isn’t expecting major declines in the market amid tailwinds from solid earnings, falling interest rates and new tax legislation.
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