Navigating a K-Shaped Economy: Bifurcation Reaches Internet Boom Levels
Much like equities, the economy remains very bifurcated.
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Equites remain very bifurcated just three weeks away from the close of another very profitable year for index investors.
The rally in stocks has once again been driven by a few AI-related names this year, which has been the case since ChatGPT made its debut just over three years ago. The top-10 stocks by size represent roughly 40% of overall market capitalization — something that hasn’t been seen since the late stages of the Internet Boom, a quarter of a century ago.
Stocks are hardly the only thing split between the haves and the have nots. The U.S. has become much more of a K-shaped economy in recent years. The top 10% of American households by income now accounts for roughly half of all consumer spending. This is up from just under 40% at the turn of the century, the last time the U.S. enjoyed a fiscal budget surplus.
This bifurcation is being seen throughout the economy. Luxury home builder Toll Brothers (TOL) posted quarterly results on Wednesday. Toll’s average home selling price was nearly $1 million, and management outlined plans to grow its average community count by 8% to 10% due to strong luxury segment demand. Meanwhile, mass market home builders D.R. Horton (DHI) and Lennar (LEN) are experiencing consistent year-over-year sales declines. With growing incentives, the recent average home selling price at Lennar is under $400,000 and below pre-pandemic levels.
JPMorgan Chase & Co. (JPM) fell 4% in trading on Wednesday. This was partly the result of a member of its leadership team that described the U.S. economy as "a little more fragile" than previously forecast while speaking at the Goldman Sachs 2025 Financial Services Conference.
Perusing third quarter results from consumer-dependent firms turns up some interesting comments and data points. Larger-ticket categories are seeing some demand slowdowns. Part of this is likely being driven by increasing worries about a faltering jobs market. Reinstatement of student loan payments, as well as reporting those loans again to credit bureaus, has reduced the potential buyer pool for big ticket purchases that are typically financed such as automobiles, appliances, homes, boats and vacations.
We have heard cautionary commentary about the consumer from the likes of Starbucks (SBUX) , Chipotle Mexican Grill (CMG) and Home Depot (HD) this earnings season. Dollar Tree, Inc. (DLTR) and Walmart (WMT) have benefited from a more frugal consumer as well and are likely to continue to do so.
My view is that 2026 is likely to be an inflection point for the economy. It will either broaden, or the higher income household will finally become more cautious, taking away a key pillar of the consumer economy. Las Vegas is signaling a broader based slowdown, and this tourist destination has historically been a canary in the coal mine when it comes to consumers.
That said, the gambling mecca could be quite affected by a notable slowdown in visitors from Canada. Airline and cruise ship demand are typically late cycle indicators that turn south before any significant economic downturn. So far, both are holding up well, but I am keeping an eye on both industries for any signs of demand deterioration.
And that is what I am watching in this K-shape economy that continues to unfold.
At the time of publication, Jensen had no positions in any securities mentioned.
