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  • Writer: Investment Research Partners
    Investment Research Partners
  • 57 minutes ago
  • 13 min read

Executive Summary

  • Over the past few years, interest in artificial intelligence (AI) has driven the growth of a handful of US technology companies to dizzying heights.

  • At the same time, investments in passive, market-capitalized index funds have continued to grow, creating a self-reinforcing flywheel that pushes even more money into the largest companies.

  • Society mirrors the wealth concentration we see in markets today, leading to what has been described as a “K-shaped” economy – one that works for the affluent, but leaves everyone else struggling.

  • In this piece, we seek to explore the top-heavy nature of both markets and society in the US today.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.”[1]

The quote above, from A Tale of Two Cities, remains one of my favorite literary quotes. The idea of two seemingly divergent perspectives being true at the same time and the need to embrace the paradox to find a path forward, resonates with me.  Referencing the quote above, this moment in both markets and the economy does feel like the best of times for some, but the worst of times for many others.

 

The “K-Shaped Economy”, a term coined by Peter Atwood (an economist, author, and professor at William & Mary College), attempts to describe the stark differences in perspective between individuals in higher-income brackets (upper-half of the “K”) and those in middle- and lower-income groups (lower-half).  In general, wealthier homeowners and investors have benefited from rising home prices and advancing markets in recent years.  As for low- and middle-income individuals, they are disproportionately impacted by the effects of higher inflation and lower affordability.  Unemployment has risen, inflation remains above target, and they have not benefited from the rise in asset prices because they have far less exposure to stocks and real estate. 

 

The idea of a “K-shaped” economy has been picked up by many economists and journalists since its introduction (for example, see Kyla Scanlon here, Nate Cohn here, and John Mauldin here).[2][3][4]  Likewise, many, including our firm, have written about the market concentration that exists in large US technology stocks.  In this piece, we will examine the notion of a K-shaped economy from two angles – from a market and a societal perspective – in an attempt to understand where this phenomenon may ultimately lead.

 

Top-Heavy Markets

Readers are likely aware that artificial intelligence (AI) has been a major theme in markets and market-related media since OpenAI’s launch of ChatGPT in 2022 (just over three years ago!).[5]  The so-called “Magnificent Seven” or “Mag 7,”  terms coined to describe the US technology-focused companies Apple, Microsoft, Amazon, Nvidia, Meta, Alphabet, and Tesla, has helped push the overall market higher since then.

 

For example, the Nasdaq Composite index, a technology-focused index includes the Mag 7 among its top ten holdings, is up over 96% since the launch of ChatGPT on November 30, 2022.   That translates into an annualized rate of return of over 23% for the period, easily outpacing the S&P 500 index.[6] 


The outsized performance of a handful of AI-related tech companies also translates into large increases in the values of these firms.  For example, Nvidia recently became the first $5 trillion company, making it the largest company in the S&P 500 index with a weight of over 7%.  In fact, Nvidia’s current market capitalization is approximately equal to that of the bottom 240 companies in total (which comprise about 8% of the index).[7] 

 

The rise of passive, market-capitalized, index-based investing may also serve to reinforce this top-heavy phenomenon.  Many investors who simply seek to own the market buy indexes for diversification.  However, as those indexes become more concentrated at the top, more and more passive investment dollars are being funneled into the biggest names, which pushes their stock prices higher, creating a self-reinforcing flywheel that helps the rich companies get richer.[8] 

 

For example, the top ten stocks in the S&P 500 index, which include the Mag 7 companies mentioned previously, currently represent nearly 40% of the overall index.  As you can see below, that is nearly twice the weight of the top ten stocks of the index in the middle of the prior four decades – a visual representation of the top-heavy nature of markets at this time.[9]  The color coding also shows the degree of turnover in the top ten holdings from decade to decade.



This concentration in technology-related companies is not just an issue for the S&P 500 index, it’s an issue for all market-cap weighted indexes.  For example, the Nasdaq Composite and S&P 500 indexes now overlap in nine of their top ten holdings.[10]  As a result, the two indexes are becoming harder to tell apart (see parody below).[11]



The concentration is not just a market phenomenon, but an economic phenomenon as well.  For example, tech capital spending as a percent of GDP last year approached the total spending on all of these major US infrastructure projects (see below).[12]  All of this leads to one question – how robust are the market and the economy if only a handful of AI-related mega-cap stocks are driving most of the growth in both? 



Top Heavy Society

In much the same way that the K-shaped economy concept has grown, a recent article by Michael Green discussing what it means to be poor in America also touched a nerve.[13]  The author was trying to determine why people felt poorer despite relatively healthy economic indicators and lower-than-average unemployment.  What he found was that the definition of poverty was developed in the 1960s by an economist at the Social Security Administration to determine how much is too little for a family of four.  The definition amounts to three times the amount spent on groceries, deemed the absolute minimum food budget.  At that time, Green points out that housing and health care were cheap, most companies offered pensions when you retired, college could be paid for with a summer job, and there were no childcare costs because one spouse or grandparents nearby watched the children.  As a result, the definition of poverty made sense given the circumstances at the time. 

 

However, by applying that definition today, the poverty line for a family of four is $31,200 (while the median household income is about $80,000).  Green goes on to calculate what he considers a more reasonable definition of poverty, using national average costs for a variety of goods and services, noting that costs for housing, healthcare, childcare, and education have risen exponentially in the past 60 years, and that pensions are nearly nonexistent today.  There has been a lot of squabbling over his approach (and we’re not going to dive into that here), but using it yielded an updated poverty line of $140,000, which is well above today’s median household income. 

 

I am less concerned about the exact calculation used to define the poverty line than the larger point Green is trying to make in the article – many of those that we classify as middle class today are really the working poor, frustrated that the American Dream is not working for them. 

 

Another recent article, this one by Adam Butler, took a very different approach from Green’s but ended up with a similar conclusion.  In this article, the author pointed out that macro data does not capture a house not purchased or a child not born because people cannot afford them.  The quote below is from the end of the article, and I think is summarizes the feelings many young adults have in this country:

 

“Return to the young man in his parents’ bedroom.  He does not know he is living under a tyranny.  He knows only that something is deeply wrong.  The official story (economy strong, unemployment low, inflation contained) does not match his experience. He is not lazy.  He is rational.  Tell a twenty-seven-year-old that the door to adulthood is now a coin-toss and he does what any rational prisoner does when the parole board walks out: he stops scrubbing the floors.  The economy calls it ‘declining labor effort’; the rest of us call it the quiet, lawful suicide of the work ethic.  Hope is not a feeling; it is collateral.  Once it is foreclosed, the debtor—our entire generation—walks away from the wreck.  Why grind for a down payment that moves further away with every paycheck?”[14]

 

For a more quantitative and visual representation of this notion, see the distribution of income in the US below.  In 1980, the richest 1% accounted for approximately 10.4% of all income earned in the country.  In 2023 (the most recent data available), the richest 1% rose to approximately 20.7% of all income earned (near the highest reading in the data set going back to 1913).  Conversely, the bottom 50% of earners fell from approximately 20% of all income earned in 1980 to 13.4% in 2023.  You have to go back to the late 1920’s Gilded Age to see the top 1% of earners outpacing the bottom 50% of earners to the degree we’ve seen in the past few years.



The chart below illustrates the issue from a different perspective – consumer spending.  Similar to the income distribution above, you can see that the top earners now account for almost half of all consumer spending (up from the mid-30 percent in the mid-90’s), and the bottom 80% of earners have fallen as a percentage of all spending since the mid-90’s.[15]  In both cases, the top and bottom of the “K” are  growing further and further apart.



As Above, So Below?

It is important to note that the “official story” of a strong economy, low unemployment, and reasonable inflation referenced in the quote above by Adam Butler is not a lie.  By most measures, the economy is solid (US GDP is a respectable 2.3% year-over-year), unemployment is lower than average (4.3% currently), and inflation is below 3% (US CPI is currently 2.4% year-over-year).[16]  Admittedly, the labor market may be softening which may be negative for the economy, but  inflation is trending lower which could be positive for economy. These macro data points are essential for policymakers, but they are much less meaningful at the personal, or micro level.  In fact, I’d suggest that these macro data inadvertently mask cracks forming in the middle- and lower-income economy.

 

The title of this section – As Above, So Below – is a paraphrased quote attributable to the Emerald Tablet, a foundational text in Hermeticism, an ancient philosophical tradition.  The saying captures a core Hermetic principle: that the macrocosm (the universe, the cosmos, the divine) mirrors the microcosm (humanity, Earth, the individual), and vice versa.  The principle insinuates that the natural order is for harmony to exist between layers or levels.[17]

 

While the official story painted by macro data suggest all is well, micro data suggest disharmony.  Consider the University of Michigan’s Consumer Sentiment Index below, which is compiled from a nationally representative survey of US households.  This index measures how favorable or unfavorable responses to survey questions about consumers’ health and outlook are at that time.  The current reading, which is in the mid-50’s, is close to the lowest levels ever recorded over the more than 70 years the survey has been conducted (index began in 1946, but data available for download began in November 1952).  In fact, a reading below 60 has in approximately 5% of all periods.  For reference, the reading has been below 60 for 9 of the past 12 months – a whopping 83% of the last year.[18]



 

The Conference Board’s Consumer Confidence Index, another survey-based assessment, corroborates the low sentiment readings seen above.  This written summary was provided with their January 2026 release: “Confidence collapsed in January, as consumer concerns about both the present situation and expectations for the future deepened,” said Dana M Peterson, Chief Economist, The Conference Board. “All five components of the Index deteriorated, driving the overall Index to its lowest level since May 2014 (82.2)—surpassing its COVID-19 pandemic depths.”[19]


Beyond survey data, we can see this divide between macro-level metrics and micro-level experiences playing out in real-time by analyzing how financial media discusses different economic groups.  The images below are Storyboards created by research firm Perscient, the parent company of the financial commentary provider, Epsilon Theory.[20]  Their process is complex, but the overly simplified version is that they:

  • Use natural language processing to scan vast amounts of global media content for narratives of interest (or more specifically, semantic signatures)

  • Summarize data (volume and density of language) on those semantic signatures with the assistance of artificial intelligence

  • Compare the current readings to historical results for the same subject matter

  • Create Storyboards to frame the narratives of today’s markets in a historical context


The two Storyboards below illustrate media narratives about high-net-worth (HNW) investors that are currently trending above their historical averages.  Market narratives suggest that high-net-worth investors are seeking more exciting returns.  Additionally, FOMO, or fear of missing out, is a very big concern for those with greater wealth (relative to past readings).



 Contrast the concerns above with those below about consumers (including all income brackets).  Media narratives about consumers, in general, paint a very different picture.  Much like the consumer sentiment numbers described earlier, media narratives are quite pessimistic – consumers who would rather save than spend and those rapidly burning through credit are both trending higher than normal. 



So, we see market narratives of high-net-worth individuals seeking exciting returns and fearful of missing out, while consumers more broadly are burning through credit and trying to build savings.  We look at solid GDP figures and think all is well, while the bottom half of the “K” is struggling with bills.  Along with the sentiment figures discussed above, I think this illustrates the disharmony in society right now. 

 

A 30-year-old saving for a first-time home, parents struggling to pay for childcare, and a young business owner looking for affordable health insurance do not care that macro-economic data look good.  The price tag they see for the American Dream is simply too high, and it moves further out of reach each day.  

 

The Path Forward

A month or two ago, I read an article about President Trump lowering tariffs on some consumer staples, hoping to reduce financial strain on lower-income earners.  Immediately afterward, I found myself reading an article about Google’s Project Suncatcher, which is a plan to build data centers in space.[21]  One article about people struggling to buy groceries, the other about a company having so much cash they’re planning to expand their AI business into outer space.  This, to me, is the absurdity of the K-shaped world.

 

It also made me think about the fragility of both the economy and the market when so much of their growth is tied to artificial intelligence.  I worry that anything that challenges the AI growth story in this country – whether that is another DeepSeek moment, AI safety regulations that stifle growth, a cyclical recession making the current pace of AI-related spending unsustainable, or some combination of these – has the potential to derail US markets and the economy.[22]  To be clear, we believe AI as a technology to be real and impactful, much like the buildout of the internet was impactful, but the dot-com bubble proved that markets and the economy are not immune to boom and bust cycles even as innovation continues. 

 

It is also entirely possible that the top-heavy nature of markets, the economy, and society is corrected in much less dramatic fashion.  For example, in a piece titled Rising Tide published in December of 2023, we wrote, “We believe the outsized returns that we’ve seen the large tech companies enjoy this year will start to widen out to smaller companies that are poised to become industry leaders by harnessing the power of AI.”[23]  We may be seeing some of that playing out in markets now, which may result in the rest of the market catching up to large US tech companies, rather than the US large tech stocks suddenly plummeting.

 

Instead of spending time speculating on how or when the top-heavy nature of the world unwinds, I believe time is better spent thinking about how portfolios should be positioned.  Market volatility and drawdowns are normal, so preparing for corrections is just part of the process.

 

From our perspective, we seek to address the top-heavy nature of markets by taking the following steps in portfolio construction:

 

  • Enhancing Diversification – We are proactively reducing market-cap-weighted strategies and gaining exposure to what we believe are more attractive parts of the market – value and dividend-focused strategies, small- and mid-cap strategies, and sectors we find attractive (e.g., biotechnology).  In addition, we are utilizing a variety of alternative investment strategies, including long/short equity, hedged equity, commodities, and other strategies that we believe can help enhance diversification.

 

  • Maintaining Meaningful Non-US Exposure – Much of the top-heavy nature of markets comes from US technology companies.  As a result, we believe maintaining meaningful exposure outside of the US is yet another way to potentially reduce exposure to this phenomenon.

 

  • Prioritize Adaptability and Liquidity – We believe we will continue to experience bouts of volatility in markets.  As a result, incorporating exposure to short-duration bonds and dividend-paying stocks can provide sources of liquidity for opportunistic buying.  For those taking distributions, maintaining a larger money-market fund position may also be warranted.


From a societal perspective, there are no easy answers or one-size solutions.  However, engaging with others in good faith to solve societal problems may be the first step in lessening the polarization and wealth inequality we see in this country.  Additionally, it may sound quaint, but your vote does matter and we are seeing some signs that politicians on opposite sides of the aisle are finding common ground on subjects like AI safety.[24]

 

This piece began with the famous and paradoxical “best of times, worst of times” quote from Charles Dickens.  As much as I love the quote, it does not move us any closer to a path forward.  Maybe best to end with this more optimistic quote from Niels Bohr, theoretical physicist and Nobel Prize winner, as he encountered a paradox: “How wonderful that we have met with a paradox.  Now we have some hope of making progress.”[25]


~ Brett Greenfield


Sources

[6] Source: YCharts, as of February 17, 2026

[7] Source: Bloomberg, as of October 31, 2025

[9] Source: JP Morgan Guide to the Market, as of January 31, 2026

[11] Source: Image created by Google Gemini 3

[16] Source: YCharts, as of February 14, 2026

[18] Source: https://www.sca.isr.umich.edu/tables.html - data as of January 26, 2026

[20] Source: https://pro.perscient.com, as of January 31, 2026

[23] Reference:  insert link here

Important Disclosures

Past performance may not be representative of future results. All investments are subject to loss. Forecasts regarding the market or economy are subject to a wide range of possible outcomes. The views presented in this market update may prove to be inaccurate for a variety of factors. These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.

 

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. Investment Research Partners shall not in any way be liable for claims, and makes no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced, and such data and information are subject to change without notice. Certain third-party sources cited in this material may require a paid subscription or may otherwise be located behind a paywall. If you would like more information regarding any cited source, please contact IRP and we will provide additional details upon request.  Please contact your Advisor in order to discuss your specific situation.



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