The American economy is increasingly splitting into two distinct realities. High-income households are spending freely, buoyed by strong wage growth, rising asset values, and accumulated savings. Lower-income Americans, meanwhile, are cutting back as stagnant wages fail to keep pace with persistent inflation on essentials.

This "K-shaped" divergence—where fortunes rise for some while falling for others—has become one of the defining economic features of 2026. New data from the Bank of America Institute provides the clearest picture yet of how this split is reshaping consumer behavior.

The Numbers Tell the Story

According to Bank of America's analysis of aggregated customer data, the spending gap between income groups has widened to levels not seen in nearly a decade:

  • High-income wage growth: Approximately 4%
  • Lower-income wage growth: Approximately 1.4%
  • Gap: The largest in roughly 10 years

"The U.S. is showing signs of a K-shaped economy, with spending among lower-income consumers showing little growth compared to their higher-income counterparts."

— Bank of America Institute analysis

This divergence has profound implications for retailers, investors, and policymakers trying to gauge the true health of America's consumption-driven economy.

What's Driving the Split

Asset Price Effects

The stock market's strong performance—with the S&P 500 hitting new highs and the Dow crossing 49,000—has disproportionately benefited wealthier households. The top 10% of Americans by wealth own approximately 89% of corporate equities. When markets rise, their net worth and confidence rise with them.

Housing Wealth

Homeowners have seen substantial equity gains as property values appreciated despite higher mortgage rates. Renters, who skew toward lower income levels, have instead faced rising housing costs without corresponding wealth accumulation.

Labor Market Dynamics

While the overall job market remains solid, wage gains have not been uniform. Professional services, technology, and healthcare have seen robust compensation growth. Retail, hospitality, and lower-wage services have experienced more modest increases that barely keep pace with inflation.

Inflation's Unequal Burden

Inflation hits lower-income households harder because they spend a larger share of their income on essentials—food, housing, utilities, and transportation—that have seen the steepest price increases. Higher-income households can absorb these costs more easily and still have discretionary income remaining.

Retail Winners and Losers

The K-shaped economy is creating clear winners and losers in the retail sector:

Thriving

  • Luxury retailers: High-end brands continue to report strong sales as affluent consumers splurge
  • Discount stores: Dollar General, Dollar Tree, and Walmart are gaining share as budget-conscious consumers trade down
  • Warehouse clubs: Costco's value proposition appeals to both demographics

Struggling

  • Middle-market retailers: Brands targeting the middle class face pressure from both ends
  • Department stores: The Saks Fifth Avenue bankruptcy filing this week reflects broader challenges
  • Fast casual dining: Restaurants in the $15-25 price range are seeing traffic declines

Consumer Spending Projections

Moody's Ratings projects that real consumer spending growth will slow to approximately 1.5% in 2026, down from the 2.5-3% pace seen from 2023-2024. The slowdown reflects "late-cycle pressures" as the economy's momentum fades.

However, aggregate spending figures mask the underlying divergence. High-income consumer spending may continue growing at 3%+ while lower-income spending contracts—yielding a moderate overall number that obscures the underlying stress.

Policy Implications

The K-shaped economy presents challenges for policymakers:

  • Federal Reserve: Interest rate cuts would boost asset prices (helping the wealthy) while potentially reigniting inflation (hurting lower-income households)
  • Fiscal policy: Tax cuts skewed toward higher earners could exacerbate the split, while targeted relief for lower-income Americans faces political headwinds
  • Minimum wage: State-level increases have provided some relief but vary widely by region

What It Means for Investors

Understanding the K-shaped economy can inform investment decisions:

  • Favor companies serving both ends of the spectrum: Luxury brands and discount retailers are both positioned to benefit
  • Be cautious on middle-market exposure: Retailers stuck in the middle face challenging dynamics
  • Watch credit quality: Lower-income consumers are increasingly relying on credit cards, creating potential risks for lenders
  • Consider employment trends: Companies with lower-wage workforces may face higher turnover and wage pressure

The K-shaped economy isn't likely to resolve quickly. Structural factors—from housing costs to healthcare expenses to educational attainment—perpetuate income disparities across generations. For investors and consumers alike, recognizing this reality is the first step toward navigating it successfully.