The holiday shopping season is off to a record-breaking start. From Black Friday through Cyber Monday, shoppers spent $44.2 billion—up 8% from last year and well above expectations. Consumers are on track to spend $250 billion this holiday season for the first time ever. Contrary to what increased consumer spending typically signals, November consumer sentiment came in 40% below average and down 26% from last year. Americans are spending like they feel great, but they certainly don’t feel that way.
This paradox has brought new attention to the “K-shaped economy”. It’s a term being echoed more frequently by corporate executives, Wall Street analysts, and Federal Reserve officials. The idea is straightforward. The upper part of the K represents higher-income Americans watching their incomes and wealth climb higher, while the bottom part reflects lower-income households struggling with weaker wage gains and stubbornly high prices. A tale of two economies.
The framework helps explain an unusually confusing economic picture. Growth appears solid, yet hiring is sluggish and unemployment has ticked up. AI-related data center construction is soaring while factories lay off workers and home sales are weak. The stock market hovers near record highs, up nearly 15% this year, even as wage growth slows for many Americans. As Peter Atwater, an economics professor at William & Mary put it, “those at the bottom are living with the cumulative impacts of price inflation while those at the top are benefiting from the cumulative impact of asset inflation.”
The Wealth Effect is Real
Stock and housing market appreciation has doubled the wealth held by the top 20% of households, fueling their spending and masking weakness at the bottom. In addition, the wealthiest 10% of Americans own roughly 87% of the stock market while the poorest 50% own just 1%. Meanwhile, lower-income families have seen inflation erode any discretionary budget, and cuts to SNAP and Medicaid combined with the resumption of student loan payments are compounding the financial pressure.
Corporate America is clearly paying attention but are still doing little. CEOs at Delta and Best Buy have commented on profits being fueled by premium products and big spenders, noticing a divide in consumers consistent with the K-shaped economy. But when it comes to higher profits or affordability, profits win.
Many consumer-facing companies have been warning about this slowdown since early 2023. Their customers are still willing to pay up for innovation and special occasions, but they’re increasingly seeking value, trading down, and postponing major purchases. The pressure is concentrated in lower-income households where discretionary budgets have been squeezed.
The Middle 60% Hold the Key
The real story sits with middle-income Americans—the 60% between the top and bottom. This group holds just 26% of total wealth but drives more than half of all consumer spending. Their continued resilience hinges on the labor market, and warning signs are starting to flash. Inflation-adjusted wage growth for lower-income workers has plunged to just 1.5% annually, well below the 2.4% gains for the highest earners.
Financial institutions aren’t yet seeing meaningful stress in credit card delinquencies or bank accounts, which offers some reassurance. However, spending data from Bank of America shows higher-income households increased spending by 2.7% in October year-over-year while lower-income groups lagged at just 0.7%. That’s a significant gap and one worth monitoring.
While fiscal stimulus (rate cuts) should support spending through the first half of 2026, weak wage growth and a softer labor market could lead to a potential pullback later next year. Many professionals worry that an economy propelled mostly by the wealthiest isn’t sustainable over the long term. Should layoffs worsen and unemployment rise, middle- and lower-income Americans could pull back sharply on spending. That would eventually impact even the companies at the top of the K.
In most markets, there is good and there is bad and it’s important to be aware of both. The key for investors is staying diversified, maintaining portfolio quality, and considering increased exposure geographical diversification as we move into 2026. At PDS, we continue to monitor client portfolios for any rebalancing or tax savings opportunities and remain open to new and updated information so we can adjust our views accordingly.
We wish everyone a very happy Holiday Season!
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