A Tale of Two Consumers: The K-Shaped Economy Defines the Holiday Season

The upper leg (Upward trajectory): Represents sectors and individuals who are thriving. It includes technology, the financial sector, businesses based on remote work, and households with high incomes and assets (stocks, real estate).

The lower leg (Downward trajectory): Represents sectors and individuals who continue to suffer. It includes manual labor, traditional retail, hospitality, and lower-income groups hit by inflation and high prices.

Key Characteristics (2025)

Widening Inequality: The 2025 economy is characterized by a sharp “chasm” between consumers. While the affluent continue to spend with confidence, the less privileged are squeezed by the high cost of living and debt.

Sectoral Divide: Industries like artificial intelligence (AI) and green energy are growing rapidly, while traditional manufacturing and low-skilled services struggle to adapt.

Policy Challenge: Central banks (like the Fed) and governments find it difficult to implement across-the-board measures, as restrictive policies (e.g., high interest rates) disproportionately affect the bottom part of the “K.”

In Greece, the discussion about a K-shaped recovery remains relevant, as macroeconomic targets are being met, but the benefits of growth are often not distributed evenly across all social groups.

U.S. markets will be open for a half-day on Wednesday and closed on Thursday for Christmas. Many international markets will also remain closed on Friday.

“Consumers will likely still feel more cautious”

American consumers are heading into the holidays with a little less cheer than last year.

While University of Michigan data released Friday showed a modest rise in consumer sentiment in December compared to November, the index at 52.9 is 28.5% lower than last December’s reading.

Similarly, home sales rose for the third consecutive month in November, but 2025 sales look likely to close the year at a 25-year low, according to data from the National Association of Realtors.

“Consumers are stating clearly that they believe the outlook for the economy has worsened quite a bit since the start of the year,” said Joanne Hsu, director of the University of Michigan’s consumer survey.

While consumer spending has remained broadly stable throughout the second half of the year, according to Bank of America, U.S. households in the top third of incomes are sourcing more than half of that spending. About a quarter of households are living paycheck to paycheck.

“The K-shaped economy creates a fragmented consumer,” said Jeffrey Roach, chief economist for LPL Financial. “The affluent are doing well, if not thriving, while lower-income households are struggling with high rent payments, rising delinquencies, and job uncertainty.”

Perhaps another reason why Thursday’s inflation data from the Bureau of Labor Statistics came as such a surprise.

With a 2.7% increase in prices over the last 12 months, the November reading was significantly lower than expectations. The reading should give the Federal Reserve the vote of confidence it needs to cut interest rates again next year, building on a total reduction of 75 basis points in 2025, said Bill Adams, chief economist for Comerica Bank.

“The Fed will be encouraged to see headline and core CPI decelerating,” as the report “strengthens the case for more rate cuts in 2026,” Adams noted in an email.

Even so, “consumers will likely still feel more cautious about inflation than the upbeat headline suggests, as prices of many non-shelter essentials continue to rise rapidly,” he said.

Traders wait all year for the “Santa Claus Rally,” which covers the last five trading days of a year and the first two of the next, as one of the best-performing weekly windows in the market.

On Friday, markets showed signs of living up to historical expectations. And, notably, so did big tech stocks.

Oracle (ORCL) stock, which has fallen nearly 40% from its September highs over concerns about its AI commitments, rose more than 7% on Friday following news that the company is the lead buyer in a group of U.S. partners purchasing TikTok from its Chinese parent company, ByteDance.

Shares of Nvidia (NVDA) also rose on Friday after Reuters reports indicated the Trump administration is reconsidering the Jensen Huang-led chip giant’s plans to sell its second-most powerful H200 chips to Chinese buyers.

Micron’s (MU) earnings announcement this week, and the stock’s subsequent rise of more than 10% in response, also quelled some investor fears about the state of AI and the broader market heading into the final trading days of 2025.

“Tepid U.S. labor market data, an unexpected drop in U.S. inflation figures, and a notionally dovish Fed are providing a tailwind for equity prices,” wrote Capital analyst Kyle Rodda in a note to clients.

“Despite the Fed all but giving the green light for a Santa Rally, justifiable fears about valuations are to keep a handbrake on the market and keep it away from all-time highs.”

Nevertheless, most Wall Street strategists remain optimistic about the market’s prospects heading into next year, with the backdrop of economic growth and earnings also offering reasons for investor excitement outside of the AI trade, which has become a mainstay for many in recent years.

“2025 was a good example of the early optimism phase [of the macro cycle] where many equity markets… have seen valuations rise with earnings,” Goldman Sachs analysts wrote in a client note.

“We believe the optimism phase will continue into 2026.”

Economic data: Chicago Fed National Activity Index, September (-0.20 expected)

Earnings calendar: No notable earnings.

Economic data: ADP weekly job change, week ending Dec. 6 (16,250 prior). Personal consumption, Q3 (+2.7% expected). Core PCE, quarterly, Q3 (+2.9% expected). Durable goods orders, October preliminary reading (-1.5% expected, 0.5% prior). Industrial production, month-over-month, November (+0.1% expected, +0.1% prior). Richmond Fed Manufacturing Index, December (-15 prior). Conference Board Consumer Confidence, December (92.0 expected, 88.7 prior).

Earnings calendar: No notable earnings.

Economic data: MBA mortgage applications, week ending Dec. 19 (-3.8% prior). Initial jobless claims, week ending Dec. 20 (223,000 expected, 224,000 prior)

Earnings calendar: No notable earnings.

Markets closed for Christmas.

Economic data: No notable economic data.

Earnings calendar: No notable earnings.