Keeping up with the K-shaped economy

The “K” may not stand for kryptonite, but our K-shaped economy could be the stock market’s most underrated weakness.

This morning, we found out that consumer activity plateaued during the height of the holiday shopping season:

• Retail sales came in flat in December, below the 0.4% increase that economists were expecting, and down from the 0.6% jump in November.
• In perhaps even more foreboding news, delinquency rates on loans rose to 4.8% of all outstanding US household debt in Q4, the highest rate since 2017. Data from the New York Fed showed that mortgage payment delinquencies were the biggest driver of rising defaults, and those were primarily from low-income zip codes.

These stats point to a trend economists have been noticing for months: Our economy is being increasingly propped up by the wealthiest among us, while most Americans are stressing about the cost of day-to-day essentials. That’s part of the reason that macro indicators show the economy is broadly keeping calm and carrying on, even though many can’t seem to shake the feeling that the vibes are off.

Economists expect the K-shape will get even more pronounced. “Looking ahead to 2026, consumer momentum remains narrow and uneven, increasingly reliant on higher-income households, a greater willingness to borrow, and continued savings drawdowns,” explained EY-Parthenon Chief Economist Gregory Daco in a note today.

The many-dollars tree

Corporations are chasing where the money is, so much so that even stores known for being bargain-hunting meccas are trying to move into the ritzy part of town.

Just look at Dollar Tree, which is hoping to shed its reputation as a cheap alternative to Walmart and cater to richer clientele. Its 9,000th store just opened within walking distance of a Louis Vuitton, and it’s not alone: a greater share of new stores are being built in affluent zip codes than in years past.

The big picture: The K-shaped dynamic could have disastrous implications beyond wealth inequality.

If the market is relying too heavily on high growth sectors (cough cough, AI) to carry momentum in lieu of a broad, healthy consumer base, it can spur volatility when growth slows and the rest of the market isn’t prepared to pick up the slack. And if the consumer drawdown begins to affect even higher-income Americans, the entire house of cards can come tumbling down all at once.—LB