The American consumer has long been the engine of the U.S. economy, powering roughly 70% of GDP through relentless spending on everything from smartphones to SUVs. But in 2026, that engine is sputtering—for some Americans, at least.

A growing chorus of economists, retailers, and market analysts are warning about the "K-shaped economy"—a term that describes a fundamental divergence in how different segments of the population are experiencing economic conditions. The top part of the K represents affluent consumers who continue to thrive; the bottom part represents everyone else, who are feeling squeezed.

Two Americas, Two Economies

The numbers paint a stark picture. According to EY Parthenon analysis, the wealthiest 10% of American consumers now account for approximately 50% of total consumer spending. This concentration of purchasing power at the top has profound implications for businesses and investors.

"Not only is it higher income versus lower income, but it's also age-based and asset-based. If you're generally older and have a lot of assets, particularly in the stock market, then you're feeling pretty good about life. If you're not in that bucket, you're not feeling as optimistic."

— EY Parthenon consumer research

The luxury segment tells one story: Hermès handbags, Rolex watches, and first-class airline seats remain in high demand. High-end retailers reported robust holiday sales as wealthy consumers shrugged off inflation and economic uncertainty.

The mass market tells a different story entirely. More than 60% of Americans report they have already changed or plan to change their buying habits, according to McKinsey's ConsumerWise survey. Most are cutting back on non-essentials, trading down to private-label products, or hunting for promotions and discounts.

The 'Scrimp and Splurge' Mentality

Consumer behavior has evolved into what analysts call "scrimp and splurge"—a pattern where shoppers ruthlessly economize on everyday basics while still selectively spending on items they truly value.

The research reveals that 74% of consumers would switch brands in exchange for lower regular prices. Health benefits, clean ingredients, and product durability have become key purchase criteria as shoppers become more intentional about where their dollars go.

This shift is hammering companies that occupy the middle ground between discount and luxury. Traditional department stores, casual dining chains, and mid-priced brands find themselves caught in no-man's-land—too expensive for budget-conscious shoppers, not aspirational enough for the affluent.

The Consumer Sentiment Puzzle

Perhaps the strangest aspect of the K-shaped economy is the disconnect between economic data and how consumers feel. The stock market sits near record highs. Unemployment remains historically low. GDP growth has been solid.

Yet McKinsey's survey shows that 43% of consumers now rank inflation as their top financial concern, while 29% cite tariffs as a major factor shaping their spending decisions. Consumer confidence measures remain well below pre-pandemic levels.

Some economists have dubbed this phenomenon the "vibepression"—a period where traditional economic metrics look healthy but the lived experience for most Americans feels far more precarious.

What's Driving the Divide?

Several factors explain why the K-shape has become so pronounced:

Asset Appreciation. The stock market's surge has been a windfall for Americans with significant investment portfolios—predominantly older, wealthier households. Meanwhile, those without stock exposure have seen little benefit from rising equity valuations.

Housing Wealth. Homeowners have watched their property values climb, building substantial paper wealth. But renters—who skew younger and lower-income—have faced soaring housing costs without any offsetting asset appreciation.

Wage Dynamics. While wages have risen, inflation has eroded purchasing power for many workers, particularly those in lower-paid service jobs. Real wage gains have been concentrated among high-skill, high-demand professions.

Debt Burdens. Lower-income households are more likely to carry high-interest debt—credit cards, auto loans, and increasingly, Buy Now Pay Later obligations. Rising interest rates have increased the cost of carrying this debt, squeezing discretionary budgets further.

Implications for 2026

Moody's Ratings expects real consumer spending growth to decline to approximately 1.5% in 2026—a meaningful slowdown from recent years. More concerningly, this growth will be heavily skewed toward the top end of the income distribution.

For retailers, the message is clear: Pick a lane. Companies that successfully target either the luxury consumer or the extreme value shopper are thriving. Those stuck in the middle face an increasingly difficult environment.

Dollar General and other deep discounters have seen their stock prices surge as investors bet on a continued shift toward value-oriented shopping. At the other extreme, luxury conglomerates like LVMH continue to report robust sales from high-net-worth customers.

The Bottom Line

The K-shaped economy is more than an economic curiosity—it's a structural shift that's reshaping consumer industries, investment strategies, and ultimately, American society. The old assumption that "a rising tide lifts all boats" has given way to a more uncomfortable reality: Some boats are rising while others are taking on water.

For investors, understanding which side of the K your portfolio companies serve has become essential. For consumers, the divide is a daily reality. And for policymakers, the widening gap poses questions about growth, opportunity, and the social fabric that won't be easily answered.