By Ellen Hazen, CFA®, Chief Market Strategist

What We’re Watching in December

• Jobs. November nonfarm payroll data will be announced on December 16. October jobs data will not be announced, as it was not collected due to the government shutdown. September jobs were surprisingly strong, at 119,000 nonfarm payrolls, which compares favorably both with August (-4,000) and with ADP September jobs (-29,000)
• FOMC meeting. The Federal Open Market Committee will meet on December 9-10. The market is currently pricing in a final 0.25% cut in 2025 to the Federal Funds Rate at this meeting. The FOMC has reduced the Federal Funds Rate by 0.50% in 2025 and by 1.50% from the 5.25-5.50% peak in early 2024. Market participants currently expect that the FOMC will reduce the Federal Funds Rate by another 0.50% in 2026
• Inflation. Both the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) have remained well above the Fed’s 2.0% target, with the most recent readings at 3.0% (CPI) and 2.9% (PCE). Also, the Fed only specifically targets the PCE (2% target), not the CPI
• Earnings estimates for 2026. Q3 earnings for the large-capitalization S&P 500 Index were better than expected, at +13% year-over-year growth. Currently, analysts expect that 2025 earnings will grow by 9.9%, followed by 13% growth in each of 2026 and 2027. Estimates have been (slowly) increasing in the large-capitalization sub-asset class over the past few months
• Hyperscaler capital expenditures for 2026 and 2027. Over the past 3 months, the four large so-called hyperscalers (Alphabet, Amazon, META, and Microsoft) have increased their 2027 estimated capital expenditures (or “capex”) by more than 25%, from $329 billion as of August 31 to $414 billion as of November 30. Three of those four companies (META, Alphabet, Amazon) have issued debt to cover part of the increased capex, although all four remain well-capitalized with low leverage
• Global equity performance. Over the past 11 months, both international developed market and emerging market equities have materially outperformed large-capitalization US equities (S&P 500 Index). International developed market equities (MSCI EAFE Index) have returned over 28% and emerging market equities (MSCI Emerging Markets Index) have returned over 30% while the S&P 500 has returned just under 18%. Currently, earnings estimate growth for the S&P 500 Index is notably higher than that of EAFE, at +13% for each of the next 2 years, vs. 9% for EAFE. Earnings in emerging markets, however, are expected to grow 17% and 13% for the next two years, underpinning the recent outperformance of this market segment
• US equity market breadth. Unlike the strong performance of international equities (which have been aided by a weaker US Dollar), indexes focused on domestic small- and mid-sized companies have struggled to perform. The S&P MidCap 400 Index has appreciated by only 7% year-to-date, while the S&P SmallCap 600 Index has returned just 6%
• 2026 GDP will be boosted by fiscal stimulus. The 2025 tax bill is likely to boost 2026 GDP by 0.30% to 0.40%, due to the combination of individual tax cuts (no taxes on tips or overtime) and corporate tax cuts (bonus depreciation, which enables companies to write off the cost of qualifying assets immediately, reducing their tax burden). This impact will start to be felt in Q1 2026. Currently, economists estimate GDP growth in 2026 of 1.9%, flat with 2025’s pace of growth
• Cracks in cryptocurrencies. November was a rocky month for cryptocurrencies, with Bitcoin declining by over 16% and Ethereum declining by more than 21%. This mirrored declines in other perceived risky assets

Navigating a K-shaped Economy

While economic growth since the pandemic has been relatively strong as measured by GDP, the US economy has, in fact, been more “K-shaped.” That is, the upper end of household earners is experiencing stability and/or growth, while lower-end earners are struggling. We examined data across incomes, wealth, spending, credit quality, and consumer confidence to assess this argument and found that higher-income households are benefiting significantly more in the current economy than lower-income households.

Income. The Federal Reserve Bank of Atlanta reports wage growth broken down by wage levels, as you can see in the chart below. (The lowest-wage quartile is in blue, and the highest-wage quartile is in red). For the seven years between 2015 and 2022, the lowest-wage quartile had the highest wage growth, meaning that wage inequality was declining. However, since 2022, wage growth for the lowest-wage quartile has fallen precipitously, suggesting that wage inequality is now increasing.

Wealth. The advantage that better-off households have over lower-income households is even larger when it comes to wealth. According to the Fed’s Distribution of Household Wealth dataset, the top 20% of households by income holds 71% of all wealth, while the bottom 20% of households by income hold just 3%. With the S&P 500 and Bloomberg Barclays Aggregate bond index up by more than 17% and 7% in 2025 respectively, wealth has simply compounded much more quickly for the higher-income households, which are more likely to benefit from rising investment portfolio values.

Spending. Higher-income households have been spending more in 2025, likely reflecting the effects of higher wage growth and buoyant portfolio values. The Bank of America Institute’s November Consumer Checkpoint report shows that for the last two years, higher-income household spending has outpaced lower-income household spending. The most recent reading (October 2025) illustrated this with high-income households growing their credit and debit card spending by 2.7% Y/Y while lower-income household credit and debit spending grew by only 0.7%.

Lower-income households’ spending growth was 0.7% YoY in October, compared to 2.7% YoY for higher-income peers
Total credit and debit card spending per household, according to Bank of America card data, by household income terciles (3-month moving average, YoY%, SA)

Credit quality. When we examine credit card delinquencies by income, again, we see more deterioration in the lower-income cohort than in the higher-income. The charts below come from a recent Federal Reserve report on the dynamics of consumer delinquency rates. You can see that households in lower income census tracts have higher delinquencies than those in higher income census tracts for both credit cards and auto loans.
Retail sales growth. Retail sales data also reflect a disparity between high- and low-income consumer spending. As one example, Ralph Lauren, which caters to a higher-end consumer, has reported an increase in same-store sales of 12-13% over the last three quarters. Meanwhile, Gap, which caters to the low-to-midrange consumer, has reported an increase in same-store sales of only 1-3% over the last three quarters. Ralph Lauren earnings estimates have increased over the past six months, while Gap’s have declined. The companies’ stock prices have followed suit; year-to-date, Ralph Lauren stock is up by 56%, while Gap is up by only 17%.

Consumer confidence. Finally, we see a similar discrepancy in the data reflecting consumer confidence. When analyzing the monthly Conference Board surveys by income cohort, the highest-earning households report a confidence level of 103 (indexed to 1985), while the lowest-earning households report a confidence level of only 64. Interestingly, both cohorts’ confidence readings have been steadily declining for the past four years, although the gap has gotten wider in recent months.

Delinquency Rates Across the Income Distribution

Note: Delinquency rate measures the fraction of balances that are at least 30 days past due, excluding severe derogatory loans.
Data are seasonally adjusted. Source: Federal Reserve Bank of New York Consumer Credit Panel/Equifax

Implications.

In terms of impact on GDP readings, the spending habits of higher-income households carry a higher weight than those of lower-income households. According to the Dallas Fed, the top 20% of households by income account for 57% of overall consumer spending, and the top 10% of households account for nearly 50%. So, from a purely economic point of view, the fact that lower-income households are experiencing less prosperity is likely of less mathematical significance.

That said, broader prosperity is more desirable than narrow prosperity, both for economic outcomes and the strengthening of social bonds. Just as a broad equity market rally – one in which many stocks are increasing, not just a few – is healthier than a narrow equity market, so too is broad prosperity healthier than narrow prosperity. It is more robust and more resilient in the face of negative surprises than a narrow one.

Lower-income households will see some relief from the One Big Beautiful Bill Act (OBBBA) in early 2026 – the dollar benefit of the new “no tax on tips” and overtime tax refund policies are likely to range between $500 to $3,000 per impacted household. This is comparable in magnitude to the three pandemic-era stimulus checks households received in 2020 and 2021.

There are a variety of factors that have contributed to the K-shaped economy we are currently experiencing, and it is hard to pin this large-scale trend on any one theme. Key factors range from high housing and healthcare costs to stagnant real wage growth and wealth inequality. Because the contributing factors are sometimes contradictory – for example, a lower Federal Funds rate would both inflate financial assets (reinforcing the K-shaped dynamic) and lower credit card borrowing rates (counteracting the K-shaped dynamic) – there is no obvious policy path for actors seeking to ameliorate the K-shaped economy. As investors, we believe that looking at surface-level, aggregate statistics on the economy or the markets in such an environment misses vital details that arise from the K-shaped economy. We are carefully assessing these factors as we continue to identify attractive investment opportunities across asset classes, sub-asset classes, and individual securities.

Disclosures