A significant shift is reshaping the American economy, one that helps explain some of the conflicting signals you may be hearing. While overall consumer spending numbers look resilient, beneath the surface lies a divided reality that’s influencing the investment landscape.

The Growing Divide

By the second quarter of 2025, the top 10% of earners accounted for 49.2% of all consumer spending—the highest level since recordkeeping began in 1989. High-income households continue spending at strong levels, supported by solid wage growth, healthy savings and years of investment gains. Meanwhile, lower- and middle-income households face a different reality: Their wage growth has slowed to just 1.3% annually and savings rates dropped from 5.7% in April to 4.6% in August as families tapped their reserves to maintain spending.

This matters because different parts of the economy are now moving in opposite directions at the same time.

The Tariff Effect

The 2025 tariff changes have intensified this divide in ways that will likely persist. With U.S. effective tariff rates reaching 18%—the highest since 1934—consumers are bearing 50% to 70% of these costs through higher prices on furniture, electronics, appliances and other goods. These tariffs hit lower-income households harder since they spend more of their budgets on physical goods rather than services.

This creates winners and losers among companies. Businesses serving premium customers can more easily raise prices to cover tariff costs while maintaining their profit margins. Companies dependent on middle-income consumers face pressure from both higher costs and customers who are pulling back on spending—a difficult combination for earnings.

We should note that the Supreme Court is currently deliberating the legality of some of the Trump administration’s tariffs. If these tariffs are struck down, it could provide some consumer relief if companies choose to lower prices in response. It could also provide stimulus to the economy, as the government would likely be on the hook to refund tariffs levied back to the companies that paid them.

What This Means for Markets

When nearly half of all spending comes from the top 10% of earners, businesses serving this group are in a structurally better position. Luxury goods, premium services, high-end travel and upscale dining aren’t just doing well—their customer base continues expanding its spending. Companies serving mass-market consumers face ongoing challenges from both higher costs and customers pulling back.

The dynamics at play also create uneven risks. When lower-income households run through savings and face potential job market weakness, their spending can drop quickly rather than gradually. Credit card debt has returned to pre-pandemic levels while income growth lags, setting up conditions for sudden shifts and increased volatility in consumer sectors.

The Federal Reserve’s Challenge

The divided consumer complicates things for the Federal Reserve. Inflation persists in services and high-end goods driven by affluent demand, while weakness shows up in mass-market segments. This makes interest-rate decisions increasingly difficult and affects how both bond and stock markets respond to Fed policy.

Moving Forward

American consumer demand isn’t weakening uniformly. The segments serving affluent consumers remain strong, and these businesses represent significant portions of major indexes. The challenge for portfolio managers is to understand which companies benefit from concentrated spending power and which are dependent on broad-based consumer strength, then allocate accordingly. In an economy where spending power has become increasingly concentrated, this distinction matters more than it has in years.

Our investment team is watching this trend with interest and will adjust client portfolios as appropriate in response.