Bill Andrakakos, CFA, FRM
President & Chief Investment Officer
Toby Stannard, CFA
Partner, Deputy Chief Investment Officer
Thomas Gogola, CFA
Vice President, Investment Management
Introduction
According to the WSJ, IBM reigned as America’s most valuable company in 1985, with a market capitalization of roughly $32 billion at year-end and a weight of approximately 6.4% in the S&P 500, far ahead of the next-largest firm, Exxon Mobil, then Exxon Corp. With more than 405,000 employees and revenues above $50 billion, IBM represented an era in which capital, labor, and technology were closely aligned in productive capacity and economic output. Its 1985 profile was more than a nostalgic high-water mark for a blue-chip American firm; it captured a period when the nation’s most valuable company was also one of its largest employers, and scale was measured not only in market capitalization, but in paychecks signed, pensions promised, and communities sustained. Today’s corporate giants mark a sharp departure from that model, rekindling tension around how prosperity is generated, allocated, and understood. Nvidia, now firmly established as the poster child of the artificial intelligence revolution, is nearly 20 times more valuable and five times more profitable than IBM at its peak on an inflation-adjusted basis, yet its headcount is barely one-tenth of IBM’s.1 That contrast captures a defining feature of the modern technological economy: capital, not labor, has become the primary engine of wealth creation and accumulation. As a result, prosperity increasingly accrues to a narrow cohort of asset owners, while the income-sensitive majority (asset-light wage earners) faces weaker demand for its labor and a declining share of value capture. Fiscal and monetary policy, most visibly in response to the 2008 Financial Crisis and the Covid pandemic, has amplified that divergence and contributed to greater economic, social, and political polarization.
The notion of a K-shaped economy has moved beyond the footnote-laden pages of financial academia and into the real economy, reshaping conversations in corporate boardrooms and policy circles at the Federal Reserve. Its appeal is both visual and conceptual: it captures an uneasy moment in which investors can celebrate strong market returns while many households struggle to keep pace with the cost of the American Dream. Growth remains solid even as unemployment edges higher. Consumption appears resilient despite eroding confidence. Corporate profitability widens as household balance sheets deteriorate. On the surface, the American economic dashboard glows green. The prevailing super-cycle reinvigorates Wall Street, buoyed by record market highs and a seemingly boundless amount of capital for AI investments. Beneath it, however, the bright signals are concentrated along a narrow ridgeline, leaving less room for error if conditions turn or policymakers are unable to navigate through stubbornly sticky inflation and a weakening labor market.
The central point is not simply that the economy is uneven; it is that today’s growth increasingly depends on two narrow supports: asset-sensitive consumption at the top of the income distribution and concentrated AI-related capital spending. That structure can look robust in aggregate while becoming more fragile underneath, because any shock to asset prices, confidence, or AI monetization would be transmitted through a much narrower base than traditional macro data suggests.
In this edition of Aaron Wealth Advisors’ “The View from Here,” we examine the widening economic divergence beneath the surface of strong headline data, explain why aggregate measures can create optical illusions, and show why narrow growth makes downside risk nonlinear. We present the analysis in two sections:
Section I: A Tale of Two Economies
Part I: The Shape of Divergence
Part II: When Average Isn’t Average
Section II: Implications for the Future
Part I: Instability; Not Uncertainty
Part II: Navigating the Terrain
Uncertainty is a word often used loosely, though, in reality, the terrain of markets and economics is never truly predictable. Financial markets may recoil at the unknown, but its participants quickly learn to hedge, re-price, or shift risk. Characterized by thematic concentration, elevated valuations, and cross-asset class contagion, many argue today’s financial markets appear primed for uncertainty, paving the way for greater volatility. However, what appears underpriced – and largely ignored – is the risk of instability lurking beneath the surface. When growth is powered by a limited, asset-sensitive cohort, even modest shocks can amplify market downturns, complicate policy transmission, and inflame social unrest. As we’ll learn, aggregates often obscure distinction, providing a reminder on how the story of the “whole” can materially differ from the story of “most”.
Section I: A Tale of Two Economies
Part I: The Shape of Divergence
The alphabet has long helped economists describe the shape of recoveries. L-shaped, U-shaped, V-shaped, and W-shaped recoveries each offer a simple visual shorthand for a more complex economic path. That simplicity is useful because it gives investors and policymakers a common language for describing how an economy returns, or fails to return, to growth. We have letters representing recoveries such as:
- L-Shaped: Persistent Stagnation with No Return to Normal
- U-Shaped: Slow Uniform Recovery
- V-Shaped: Quick Broad Bounce
- W-Shaped: The (Rare) Double-Dip Recession
However, unprecedented disruption and structural shifts within both financial markets and the real economy have given rise to a distinctly different recovery pattern. One defined not by uniform healing, but by bifurcation and polarization.
- K-Shaped: Divergent, Uneven Reshaping
A K-shaped economy describes a recovery or growth pattern in which different segments of the economy move in sharply different directions at the same time. Instead of rising or falling together, the economy splits into two paths, like the arms of the letter K. One arm moves upward, representing groups that benefit disproportionately from growth, often asset-sensitive households and firms. The other slopes downward, representing groups facing stagnation or decline, often income-sensitive households with less exposure to appreciating assets.
Peter Atwater, an economics professor at the College of William & Mary, is widely credited with popularizing the term and/or concept.2 He argued that the pandemic lifted the fortunes of the wealthy and remote workers, while leaving many blue-collar workers behind, deepening societal and economic divides. While the period immediately after the pandemic saw a reversal of this trend as lower income distributions rose more rapidly due to shortages of labor in certain sectors, it ultimately proved temporary. The global pandemic merely paused the push-and-pull dynamics of dispersion. With the pause now lifted, the economy continues along its bifurcating path, with divergence once again compounding.
Part II: When Average Isn’t Average
In pursuit of clarity, economists and investors often aggregate measures to simplify, summarize, and analyze the behavior of an entire economy. By turning millions of individual decisions into a manageable set of numbers and statistics, its aim is to offer topline perspective on the health of an economy. These aggregate metrics dominate macroeconomic models and national accounting, even as they obfuscate critical underlying detail. Nowhere is this more apparent than with GDP, which is treated as the exclusive arbiter of economic health.
GDP measures the total market value of final goods and services produced within a country over a period, measuring its total economic output. The measure, however, provides little about how that output is generated, who benefits, or how sustainable it is. Its formula follows:
GDP = Consumption + Investment + Government Spending + (Exports − Imports) 2
The U.S. economy experienced solid growth in 2025, with real, inflation-adjusted GDP increasing by 2.1% for the full year after a 2.8% increase in 2024. At first glance, GDP conveys solidity: a single figure suggesting breadth, resilience, and forward momentum. But what appears to be macroeconomic stability may instead reflect an asymmetric structure in which a narrow cohort accounts for an outsized share of output. That is not merely a cyclical or temporary phenomenon; it is a structural concern.
We will deconstruct two components of GDP for this paper: consumption and investment. While government spending and trade are certainly important as well, we omit them from this discussion in the interest of brevity.
Consumption (C)
Consumer spending has long been viewed as the quiet engine beneath the American economy. A statistic on paper, yes, but also a pulse measuring the health and confidence of a nation. Consumer spending acts as the primary driver of aggregate demand which fuels economic growth, accounting for nearly 70% of U.S. GDP. When households open their wallets and spend, revenues grow, earnings follow, and equity valuations expand to justify the growth they help create.
The American consumer once again carried the banner in 2025, with nominal consumer spending growth ranging between 3.7% and 4% annualized. Top-line data suggests resilience bordering on strength, yet beneath lies a rather uneven reality. A reality in which consumers in the top 10% of income distribution accounted for nearly 50% of total spending in 2025,3 the highest-level dating back to 1989. In turn, spending for those in the bottom 80% of income distribution struggled to keep pace with the compounding effects of post-pandemic inflation (Figure 1).
Figure 1: Personal Outlays by Income Group4
Source: Federal Reserve Board, Bureau of Economic Analysis, Census, Moody’s Analytics
Many argue that U.S. consumer spending has long been top-heavy; however, what is often overlooked is the degree of that concentration. In the 1990s, the top 10% held a share in the mid-30s. By the end of 2019, that share had risen to 43%, and following the pandemic, concentration escalated swiftly to historic highs near 50%.5
Wealth disparities today also exceed those of earlier periods, strengthening the “wealth effect” as it pertains to consumption. The wealth effect refers to the tendency for people to increase their spending as their wealth grows, and conversely, to reduce spending when wealth declines. With the top 10% owning over 68% of all U.S. wealth in 2025 – the highest share on record since the Federal Reserve began tracking household wealth in 1989 – the broad price surge in assets has emerged as one of the primary drivers fueling and sustaining consumption.6
Buoyed by their outsized influence on consumption, this small subset of the population may continue to drive the broader economy higher, sidestepping conventional measures of contraction and recession. However, should their behavior shift or confidence erode, the consequences would potentially ripple quickly and sharply, exposing the structural fragility beneath the economy’s surface and leaving growth vulnerable in ways that aggregate numbers alone fail to reveal.
Investment (I)
Capital investment can re-energize a moderating business cycle, spur innovation, and rekindle long-term productivity. As a crucial, albeit volatile, component of GDP, it often serves as the leading economic indicator in assessing the directional strength of an economy and its financial markets. A decline in investment frequently precedes recessions, while a surge can point to expansion and support higher asset prices. But when capital crowds into a single theme, the economy becomes tethered to expectations rather than diversified demand. Any narrative shift or shortfall in delivery can then reverberate quickly, tighten financial conditions, and amplify the risk of a broader slowdown.
Business investment in 2025 was undeniably impressive. Capital spending surged, in both concentration and intensity, with AI data center and infrastructure emerging as the dominant – in some periods the exclusive – driver of capital investment. Its imprint on GDP continues to widen (Figure 2), with forward commitments measuring in the trillions.
Figure 2: Contribution to GDP from AI is Growing 7
Sources: US Bureau of Economic Analysis (BEA), Macrobond, Apollo Chief Economist; Apollo Academy
While nuanced in nature, the relationship between higher capital investment and labor market growth tends to be circular and reinforcing. Stronger private fixed investment tends to lift payroll growth, reduce unemployment, and support wage gains. However, despite last year’s unprecedented capital investment in AI, that spending has failed to stabilize today’s weakening labor market. The Job Openings and Labor Turnover Survey (JOLTS) data painted a grim picture in 2025, as job creation concentrated heavily in healthcare. Healthcare and social assistance – which historically accounted for a mid-single-digit to mid-teens share of net job growth – represented nearly 70% of all net new U.S. jobs. Excluding healthcare, the underlying labor market was stagnant, with contractions across cyclical industries. Following downward revisions, the nation added 181,000 jobs in 2025 – the lowest non-recession annual total since 2003 – while the unemployment rate rose from 4.0%
to 4.4%.8
2025 stands as a statistical anomaly within modern labor data. While the U.S. avoided outright labor-market catastrophe, the underlying data point to a crumbling foundation beneath labor market demand: fragile, muted, uneven, and more reminiscent of recession-adjacent dynamics than expansion. Anchored by healthcare and social assistance, job growth may be sustained in the short term, but it leans on a heavily regulated, partly non-market sector that already represents a large share of GDP, limiting long-run productivity upside.
Section II: Implications for the Future
Part I: Instability; Not Uncertainty
Prior cycles saw the middle and lower quartiles of income distribution serve as a stabilizing force, as the broad base of wage earners and their steady consumption cushioned the economy when volatility emerged at the top. Today, that buffer appears materially thinner. With real wage gains modest, persistent inflation amongst essential goods, and household balance sheets stretched, the income-sensitive majority has less capacity to absorb shocks or sustain demand if asset prices falter. Should momentum at the top reverse, the broader economy may find that its traditional cushion is no longer thick enough to soften the landing, increasing the possibility of prolonged and deeper economic contraction.
Balance Sheet Resilience & Household Solvency
What once appeared to be a fortified balance sheet, driven partially by the historic buildup in household cash reserves following the pandemic, has gradually eroded. Lower-income households have experienced higher inflationary pressures than middle- or higher-income households, and are increasingly exhibiting signs of financial strain, most visibly through rising credit card and auto loan delinquencies (Figure 3).
The cumulative impact of post-pandemic inflation has eroded purchasing power, depleted pandemic-era excess savings, and left thinner liquidity buffers to absorb unexpected expenses. Data from the Fed shows that lower-income households have experienced higher inflationary pressures because their spending baskets place greater weight on categories such as rent, electricity, food, transportation, and other necessities whose prices have risen faster. As a result, corporate America has been forced to adapt its playbook to an increasingly bifurcated consumer base, recognizing that success now depends on meeting consumers where they are financially. Mass-market firms have cut prices to counter pullbacks from cash-strapped households underscoring a growing reality: the American consumer is progressing along two divergent tracks, a divide now shaping corporate strategy in boardrooms across the country.
Figure 3: Signals of Stress Amongst Lower Income Households9
Source: U.S. Bank Economics; Federal Reserve Bank of New York Consumer Credit Panel/Equifax
The quiet rise in fixed obligations, from higher insurance premiums and property taxes to elevated rents and childcare costs, has reduced discretionary flexibility. A greater share of income pre-committed to non-negotiable expenses leaves households more exposed to income disruptions or unexpected shocks. More inclined to rely on credit cards as a primary liquidity tool, lower-income households often use revolving credit to bridge gaps between wages and rising living expenses when savings buffers are limited or exhausted. However, higher interest rates have materially increased debt service costs, especially on variable-rate credit cards, making revolving balances more burdensome over time. In tandem, these dynamics point to mounting balance sheet stress among income-sensitive households, a development that carries broader implications for consumption stability and economic durability.
Sentiment
The mood of the consumer is a critical signal for businesses, investors, and policymakers. Two widely followed surveys, the University of Michigan’s Consumer Sentiment Index and the Conference Board’s Consumer Confidence Index, distill that mood by measuring current financial conditions and future expectations. Historically, consumer sentiment and the S&P 500 moved in close alignment, reinforcing how household psychology can influence market prices. Lately, however, that relationship has fragmented into a widening gap. Given the current macro data, Oxford Economics estimated that sentiment “should” be near the 90s but is instead in the low 50s, highlighting a quantified gap between models and survey reality (Figure 4).
Figure 4: Consumer Sentiment vs S&P 50010
Source: University of Michigan, Standard & Poor’s, Bloomberg; Bianco Research LLC
When confidence erodes while markets march higher, the eventual reconciliation is rarely resolved peacefully, suggesting either investor complacency or consumer distress. Similar episodes appeared in 2000, when exuberant equity valuations masked weakening underlying demand, and again in 2007, when markets priced resilience even as consumer fundamentals eroded. Similar tension appears when confidence plunges, but spending holds up only through rising credit balances or excess savings drawdowns.
In short, when the psychological foundation of the economy weakens while asset prices remain afloat, the gap becomes less a curiosity and more a warning…either confidence must recover, or valuations must adjust.
Part II: Navigating the Terrain
As we look forward, we ponder what could disrupt the two massive pillars of the current economic expansion – corporate AI infrastructure investment and high-net worth consumer demand. They are both fueled from a place of significant balance sheet strength and thus are highly insulated from minor macroeconomic bumps – currently illustrated by the impact of the Iranian war. This implies a catalyst must either fundamentally disrupt enterprise cash flow or the wealth effect.
The Catalyst to Disrupt AI Investment Spending
Tech firms such as OpenAI, xAI, Amazon, Alphabet, Meta, etc. are projected to deploy over a trillion dollars in AI capital expenditure over the next few years, initially funded by their massive corporate earnings, but increasingly dependent on the credit markets. The circular nature of AI spending – Company A invests in a cloud data center, which buys chips from Company B, which uses software from Company A, and so on – is of particular concern. If the revenue curve fails to steepen based on either lower monetization as massive new data centers come online, or corporate adoption plateaus, firms will have to slow their investment spending. That could cause a cascading collapse that impacts the entire AI ecosystem, materially impacting GDP and
shifting the narrative from growth at all costs to aggressive capital conservation.
The Catalyst to Disrupt Consumer Spending by the Top 20%
This demographic is heavily cushioned by significant cash reserves, structural salary growth, and rising equity portfolios, leaving it largely insulated from cycle-agnostic pressures such as high interest rates or localized labor-market cooling. As a result, the catalyst most likely to disrupt spending is tied directly to asset valuations. A major systemic correction in the equity or real estate market, such as a sudden decline of 30% or more, could trigger a psychological defense mechanism that leads high-end consumers to scale back discretionary spending in order to preserve capital.
The most worrisome aspect for the economy is that these two catalysts are tethered to one another. If the AI investment thesis faces a hard monetization check, it could trigger the asset-price shock required to freeze spending by the economy’s primary consumers. Both forces are currently helping drive GDP growth, but without the traditional cushion of lower- and middle-income spending, a reversal in either pillar could quickly expose the economy’s narrow foundation.
Conclusion
In the meantime, we expect persistently higher volatility as market participants absorb new information around AI spending and monetization differently, and higher yields as investors demand greater compensation for the risk embedded in an economy with such narrow growth drivers. As we have long emphasized, diversification – not only by asset class but, more importantly, by risk exposure – remains essential to successfully navigate the unique impacts of a K-shaped economy.
Sources
1 https://www.wsj.com/economy/jobs/capital-labor-wealth-economy-2fcf6c2f?mod=saved_content
2 https://news.wm.edu/2025/11/20/wm-professor-brings-k-shaped-clarity-back-to-market-discussion/
3 https://www.bloomberg.com/news/articles/2025-09-16/top-10-of-earners-drive-a-growing-share-of-us-consumer-spending
4 https://fortune.com/2026/06/26/richest-consumers-powering-us-economy-stock-price-bubble-concern/
5 https://www.bloomberg.com/news/articles/2024-10-11/us-consumer-spending-is-increasingly-driven-by-richer households?utm_medium=cpc_search&utm_campaign=NB_ENG_DSAXX_DSAXXXXXXXXXX_EVG_XXXX_XXX_COUSA_EN_EN_X_BLOM_GO_SE_XXX_XXXXXXXXXX&gclsrc=aw.ds&gad_source=1&gad_campaignid=9835680891&gbraid=0AAAAA9e5ypnM7bv3ECZi9LT_P7bHMuoD&gclid=CjwKCAjw1vXTBhB-EiwAEKr_k9Q7zwiQQAm3kHEK8JKi LPocUqO _quP3pak4JE1MlQEoqFe 1KM4ChoCMOwQAvD_BwE
6 https://www.biancoresearch.com/wealth-distribution-in-the-k-shaped-economy/
7 Tail Risks Rising: From 10% to 30% | The Daily Spark
8 https://www.wsj.com/economy/jobs/healthcare-jobs-have-become-the-engine-of-americas-labor-market-114ffd34?mod=saved_content
9 https://www.usbank.com/content/dam/usbank/en/documents/pdfs/corporate-and-commercial-banking/k-economy.pdf
10 https://www.biancoresearch.com/ai-stressed-funding-markets-the-government-restart-3/
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