Wall Street Warns of a Deepening K-Shaped Divide in the US Economy

A growing wave of concern is sweeping across Wall Street

A growing wave of concern is sweeping across Wall Street as economists warn that the US economy is splitting further into what many now call a K-shaped pattern. At the top of that “K” are higher-income households—still spending, still traveling, and still driving demand for premium services. At the bottom are lower-income Americans who continue to feel the crush of affordability challenges, rising borrowing costs, and a labor market that is losing momentum.

This divide isn’t new, but it’s becoming harder to ignore. And now experts are asking a critical question: How long can these two realities coexist before something in the economy gives way?

According to Bank of America senior US economist Aditya Bhave, the current imbalance isn’t sustainable forever. But he believes a surprising twist could play out in the coming years.

A Tale of Two Americas: Spending Thrives at the Top, Struggles at the Bottom

During Bank of America’s 2026 outlook call with Yahoo Finance, Bhave explained that the divergence between high-income resilience and low-income strain won’t last indefinitely.

“I don’t think they’re going to coexist forever,” Bhave said.
“Our view is that the bottom of the K will stabilize before the top of the K collapses.”

In other words, instead of wealthy consumers pulling back and dragging the economy downward, BofA predicts that lower-income households may stabilize as inflation cools and wages gradually adjust.

That more optimistic scenario underpins the bank’s upgraded forecast:

BofA now expects 2.4% real GDP growth in 2026 — above consensus and well above recession levels.

Why Economists Call Today’s Economy “K-Shaped”

A K-shaped economy refers to a period when different groups of people experience very different financial realities at the same time. Instead of everyone moving up or down together, one part of the population moves upward while another struggles to keep pace.

The current stage has brought higher-income families more money, solid jobs, strong buying power, and sustained investment profits. For families with lower incomes, things are dramatically different. They have more debt, fewer job prospects, and it’s getting harder to pay for basic needs.

This divide has become especially clear since 2023. It’s the same pattern we’ve watched play out in the stock market, where tech giants like Nvidia, Microsoft, and Amazon continue to fuel most of the gains in major indexes, even as many other sectors fall behind.

Just as Wall Street’s rally is uneven, so too is consumer spending.

Labor Market Softens, Raising New Questions

Bhave acknowledged that Bank of America’s optimistic stance may feel counterintuitive when the labor market is flashing signs of stress.

Recent data shows:

• Planned layoffs reached their highest November level since 2022, according to Challenger, Gray, and Christmas.
• Private payrolls unexpectedly fell by 32,000 jobs, with small businesses taking the biggest hit.
• Hiring in industries that traditionally support lower-income workers is slowing noticeably.

These are all indicators of a Main Street slowdown — and clear evidence of the widening divide.

Yet on the other side of the economy, jobless claims fell to a three-year low, suggesting ongoing resilience among more stable industries and income groups.

So which direction wins out?

Why Higher-Income Spending Still Supports Growth

Despite mixed signals, Bhave argues that the US economy may still avoid recession because of one key factor:

Higher-income households dominate US service-sector spending.

That matters because services account for five out of every six jobs in America.

“Who spends more on services — higher- or lower-income folks? It’s actually higher-income folks,” Bhave explained.
“So if you take $1 of spending and tell me it was spent by a higher-income household, I’d say that’s more likely to have been spent on services.”

This dynamic means that even if lower-income households slow down, the service sector—which includes healthcare, hospitality, entertainment, and professional services—continues to receive strong demand from wealthier consumers.

More service spending equals:

• More job stability
• Stronger wages at the mid-to-high end
• Less risk of a sudden economic downturn

This is why Bhave believes the bottom of the K could stabilize, reducing recession risk, instead of the top collapsing first.

Retailers See the Split in Real Time

Companies across the US are already feeling the effects of the K-shaped economy — and many executives are adjusting strategies based on who is still spending.

Macy’s CEO Tony Spring recently told Yahoo Finance that the company is benefiting from this divide. Macy’s main customers are feeling the pinch, but Bloomingdale’s, its high-end brand, saw sales rise 9% year over year in the third quarter.

High-end shoppers continue to show strength in:

• Luxury apparel
• Beauty and skincare
• Travel
• High-end gifting
• Premium services

Meanwhile, discount and mid-tier shoppers remain cautious, stretching every dollar in the face of higher rent, food costs, and credit card debt.

Wall Street’s Big Question: When Does Something Break?

Economists remain split on how long the current K-shape can persist.

Scenario 1: The optimistic view (BofA)

• Inflation continues cooling
• Lower-income wages stabilize
• Service-sector spending remains solid
• GDP grows above 2%
• No recession in 2026

Scenario 2: The pessimistic view

• Layoffs accelerate
• Lower-income spending contracts further
• Higher-income households finally pull back
• The service sector weakens
• The economy dips into recession

Right now, data supports both narratives — which is why analysts say this is one of the most unusual and hard-to-predict economic cycles in decades.

Why This Matters for 2025 and Beyond

The longer this K-shaped split continues, the more pressure it puts on the economy overall. Affordability challenges can fuel social tension. Corporate earnings become increasingly uneven, with luxury brands outperforming while mass-market retailers fall behind. Financial markets also grow more concentrated as Big Tech stocks shoulder most of the gains. At the same time, small businesses face tougher conditions, slowing job creation, and household debt keeps climbing — especially for lower-income workers.

Yet millions of jobs are still supported by the higher end of the economy, where spending on travel, entertainment, and other discretionary services remains strong. For now, that strength is helping hold the broader economy together.

This creates a delicate balancing act.

The Bottom Line

The US economy is at a pivotal moment. The growing K-shaped divide between Americans with high, and low incomes raises concerns about how long these two economic realities can coexist.

Bank of America’s Aditya Bhave believes the lower-income segment will stabilize, preventing a collapse at the top and helping the country avoid recession.

But with layoffs rising, payrolls softening, and affordability still a major challenge, the risks remain very real.

Investors, policymakers, and households alike are watching closely — because if one side of the K finally gives way, the impact could reshape the economic outlook for years to come.