The economy is a tale of two halves at present, with wealthy consumers reporting confidence in their outlook, while those at the lower end of the income ladder reportedly feel they’re living in a recession—albeit without widespread job losses.
TL;DR
- The economy shows a K-shaped divergence, with wealthy consumers confident and lower-income individuals feeling recessionary conditions.
- This divide is linked to wealth derived from the booming stock market, particularly from AI companies like The Magnificent Seven.
- Earnings forecasts for The Magnificent Seven have risen, while those for the rest of the S&P 500 have declined.
- Affluent Americans' spending, fueled by stock holdings, is a primary driver of economic expansion, raising long-term viability questions.
This is what economists are calling a ‘K-shaped economy,’ where the fortunes of two distinct sets of consumers are increasingly diverging over time.
Part of this growing divide between the rich and the average worker can also be traced back to where these households derive their wealth—namely from their exposure to the booming stock market of 2025.
After a bumpy week, markets are buoyed today on the news that America’s government shutdown may soon be drawing to a close. At the time of writing, the S&P 500 and Dow Jones are up a meager 0.1%, although the VIX volatility index has dropped, signaling that markets are expecting turbulence to subside. S&P 500 futures are up by more than 1%, indicating a return to bullish sentiment.
Markets in Europe are also up across the board in early trading, with Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 all up by more than 1%. In London, the FTSE 100 is up 0.7%.
The good news has also spread to Asia, where Japan’s Nikkei 225 is up 1.26% and Hong Kong’s HSI is up 1.55%.
The return of an upbeat outlook on the stock market is good news, of course, for the investors who derive their wealth from the markets. But it’s good news for the economy, too.
As Moody’s chief economist, Mark Zandi, highlighted in a note yesterday: “It’s hard to overstate the significance of the soaring stock prices of artificial intelligence companies to the economy. The primary force propelling economic expansion is the spending of affluent Americans, fueled by their rapidly increasing stock holdings.
“This so-called wealth effect is responsible for nearly half a percentage point of real GDP growth over the past year, accounting for one-fourth of the economy’s overall growth.”
Zandi's previously argued that the prospects of the economy depend on the financial success of affluent individuals, and he remarked this weekend: "It's wise to ponder the long-term viability of this situation." And if it's not, what are the implications for future expansion?
Research from The Apollo Academy indicates that both current successes and the prospects for future achievements are becoming more and more focused.
In a memo from last week, chief economist Torsten Slok, under the heading ‘K-Shaped Economy for Firms,’ detailed how, since early 2025, earnings forecasts have risen for The Magnificent Seven while falling for the S&P 493. The Magnificent 7, comprising prominent American companies (Apple, Amazon, Google's parent Alphabet, Meta, Microsoft, Nvidia, and Tesla), have significantly increased their focus on AI, not just in its implementation Within their own businesses and introducing new products to market, but also allocating resources to develop the groundbreaking technology.
A graph illustrating the 2025 EPS consensus estimates for the S&P 500 from October 2025 to April 2025 indicates that average estimations have declined by roughly 0.2%.
However, consensus estimates for the Magnificent 7 have seen a slight increase of under 4% from October to April, while the other 493 stocks in the S&P 500 have experienced a decline of around 1.5%.
Here's a look at the markets before the New York opening this morning:
- S&P 500 futures are up 1.07%.
- The STOXX Europe 600 is up 1.25%.
- The U.K.’s FTSE 100 is up 0.7%.
- Japan’s Nikkei 225 was up 1.26%.
- China’s CSI 300 was up 0.35%.
- The South Korea KOSPI was up 3.02%.
- India’s NIFTY 50 is up 0.32%.
- Bitcoin was up at $106K.