With more consumer companies preparing to report third-quarter earnings this week, Wall Street will be watching for signs of a bifurcated or “K-shaped” economy as consumers diverge in their spending behaviors.
There have been increasing signals that wealthier Americans are spending more while lower-income Americans are significantly paring back their spending. Lower-income consumers have been hit hardest by rising inflation and escalating prices on essentials. This month’s Consumer Price Index (CPI) report indicated a 0.3% increase for the month, putting the annual inflation rate at 3%.
Shortly after the CPI report was released, the Federal Reserve on Wednesday approved its second straight interest rate cut, lowering its benchmark overnight borrowing rate to a range of 3.75% to 4%. Meanwhile, the country is entering the fifth week of the government shutdown, with many federal workers going without pay.
Still, consumers with the highest purchasing power have benefited from stock market rallies and rising home values. Data from JPMorgan’s Cost of Living Survey found that higher-income consumers reported stronger economic confidence readings for the year ahead.
Recent earnings reports from companies across various sectors have indicated that the K-shaped trend is beginning to take hold. This week, companies like Yum Brands, McDonald’s, E.L.F. Beauty, Tapestry, and Under Armour are preparing to release quarterly earnings reports and could report similar trends.
Last week, Chipotle reported that consumers who make less than $100,000 a year, which represents roughly 40% of the company’s customer base, are spending less frequently due to concerns about the economy and inflation. CEO Scott Boatwright noted the company is experiencing “consistent macroeconomic pressures” with a 0.8% decline in traffic for the quarter.
Coca-Cola, in its third-quarter earnings report, said pricier products like Topo Chico sparkling water and Fairlife protein shakes are driving growth. Procter & Gamble reported similar results, noting that wealthier customers are buying more.
Some of the companies reporting this week have already indicated they may be seeing similar consumer behaviors. In early September, McDonald’s CEO Chris Kempczinski told CNBC’s “Squawk Box” that the chain’s expansion of its value menu was due to a “two-tier economy.”
“Traffic for lower-income consumers is down double digits, and it’s because people are either choosing to skip a meal or they’re choosing to just eat at home,” he said.
The trend isn’t limited to just food and beverage. In the auto industry, consumers who can afford to buy new vehicles are on a spree, while those who are more price-constrained are sitting out. Defaults and repossessions are on the rise, while the average price for a new vehicle is setting records.
In the service industry, Hilton earlier this month reported a drop in revenue for its affordable brands, while its luxury offerings performed exceedingly well. Still, CEO Christopher Nassetta told CNBC last month that he doesn’t expect this bifurcation to last much longer.
“My own belief is that as we look into the fourth quarter and particularly into next year, we’re going to see a very big shift in those dynamics,” Nassetta said. “I don’t think you’re going to continue to have this bifurcation. That’s not to say I think the high end is going to get worse or bad. I just think the middle and the low end [are] going to move up.”
https://www.cnbc.com/2025/11/03/third-quarter-earnings-economy.html