Q3 earnings point to a divided economy

As more consumer companies prepare to report third-quarter earnings this week, Wall Street will be watching for signs of a bifurcating or K-shaped economy as consumers diverge in spending behaviors.

There have been increasing signs that wealthier Americans are spending more while lower-income Americans are cutting back significantly. Low-income consumers were the most affected by rising inflation and rising prices of necessities, with this month’s Consumer Price Index report indicating an increase of 0.3% month-on-month, putting the annual inflation rate at 3%.

Shortly after the CPI report was released, the Federal Reserve on Wednesday approved its second straight 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 a government shutdown, with many federal employees remaining without pay.

The Census Bureau estimated there were 35.9 million people living in poverty in 2024, the most recent data available, with the weighted average poverty threshold for a family of four reaching $32,130. Meanwhile, the median household income was $83,730 last year, according to the bureau.

The office said in September that the top 10% of households saw their income increase by 4.2% between 2023 and 2024, but there was no significant change for the bottom 10% of households. There were approximately 33 million households in the top 10% of income earners and another 33 million households in the bottom 10% of earners as of last year.

Consumers with the highest purchasing power have benefited from stock market rises and rising home values. Data from JP MorganAmazon’s cost of living survey found that higher-income consumers reported stronger economic confidence readings for next year.

Recent earnings reports from companies touching all corners of the economy indicate that the K-shaped trend is starting to take hold. This week, like companies Yum brands, McDonald’s, The beauty of the goblin, texture and Under the armor They are preparing to release quarterly earnings reports and can report similar trends.

last week, Chipotle She said she’s seeing consumers who make less than $100,000 a year, which represents about 40% of the company’s customer base, spending less due to concerns about the economy and inflation. CEO Scott Boatwright said the company is seeing “continued macroeconomic pressures” with a 0.8% decline in traffic during the quarter.

coca cola Higher-priced products such as Topo Chico sparkling water and Fairlife protein shakes are driving its growth, it said in its third-quarter earnings. Procter & Gamble It reported similar findings, saying that affluent customers are buying more from club retailers, which sell larger packages, while lower-income shoppers are falling back significantly.

Some companies reporting this week have already indicated they may be seeing similar behaviour. 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 low-income consumers is down 10%, and that’s because people are either choosing to skip a meal…or they’re choosing to just eat at home,” he said.

This trend is not limited to food and drinks only. In the world of cars, consumers who can afford new cars are in a rush, while those with greater price constraints are holding back. Defaults and repossessions are on the rise while the average price of a new vehicle is hitting record numbers.

In the service industry, Hilton It reported earlier this month that it had seen a decline in revenue for its affordable brands while its luxury offerings were performing very well. However, CEO Christopher Nassetta told CNBC last month that he doesn’t expect the fork to last much longer.

“My personal belief is that when we look at the fourth quarter and especially next year, we’re going to see a very significant shift in those dynamics, which means I don’t think you’re going to continue to have that bifurcation,” Nassetta said. “That doesn’t mean I think the upper end will get worse or worse. I just think the middle and lower end will [are] “It will move up.”