Income-Based Divergences in Consumer Sentiment and Their Implications for Equity Strategies in 2026

The U.S. and global economies have entered a period of stark income-based divergences in consumer confidence, with profound implications for equity strategies. By December 2025, the chasm between lower- and higher-income households had widened into a canyon, driven by divergent perceptions of disposable income, inflation, and economic resilience. These divergences are reshaping sector allocations and thematic investments, as investors grapple with a K-shaped recovery where growth is concentrated among specific income groups and industries.

Lower-Income Consumers: Modest Gains Amid Persistent Strain

Lower-income households, particularly those with combined incomes under £21k, faced a 17 percentage point decline in disposable income perception by December 2025, despite official data showing modest increases. This disconnect reflects the erosion of purchasing power as inflation outpaced wage growth. While lower-income consumers demonstrated modest gains in sentiment in 2024–2025, their optimism remained fragile, with essentials like food and energy dominating spending priorities. The Conference Board's U.S. Consumer Confidence Index underscored this caution, noting that lower-income households remained the least optimistic demographic, even as the Michigan Consumer Sentiment Index edged up to 52.9 in December 2025.

Higher-Income Consumers: A Retreat from Optimism

Higher-income households, traditionally the backbone of discretionary spending, also exhibited a marked decline in confidence. Those earning over £83k saw net optimism about improving finances drop from 66% in August 2025 to 42% by December. This shift, mirrored in U.S. data where households earning more than $125k showed slightly more resilience than lower brackets, signals a broader unease about economic stability. The decline is partly attributable to the flattening of wage growth-after-tax incomes rose 3.7% for higher-income households versus 1% for lower-income ones in 2025- and the lingering shadow of inflation, which kept year-ahead expectations steady at 4.2% in January 2026.

Thematic Equity Strategies: Capitalizing on a Two-Speed Economy

The divergent trajectories of consumer confidence have fueled a "two-speed" economy, where thematic equity strategies must navigate uneven growth. Large-cap tech stocks, buoyed by the AI-driven capital expenditure cycle, outperformed value counterparts in 2025, with the Russell 1000 Growth Index surpassing the Value Index by 2.7%. This outperformance was underpinned by the fact that AI accounted for half of 2025's GDP growth, a trend likely to persist as firms continue investing in automation and data infrastructure.

Communication services emerged as a standout sector, returning 33.6% in 2025, far outpacing the S&P 500. This performance reflects both strong earnings growth and a compelling valuation relative to the technology sector, which has seen elevated multiples. Investors focused on income-based divergences have also turned to value-focused retailers like Dollar General and Dollar Tree, which gained market share as higher-income households sought cost-saving options amid economic uncertainty.

Sector Allocations in a K-Shaped Recovery

The K-shaped economy, where growth diverges across income groups, has reshaped sector allocations. Higher-income households maintained or increased spending on discretionary categories like travel and dining, while lower-income households traded down to essentials. This dynamic has benefited sectors such as communication services and value retailers but has left traditional discretionary sectors like luxury goods and high-end travel vulnerable to volatility.

The Russell 3000 and S&P 500, however, have shown resilience, with large-cap stocks acting as a buffer against broader economic headwinds. This resilience underscores the importance of strategic sector rotation: investors must balance exposure to growth-driven tech and communication services with defensive plays in essential goods and services.

Conclusion: A Cautious Outlook for 2026

As 2026 unfolds, the divergences in consumer sentiment will likely persist, driven by income inequality, inflationary pressures, and uneven wage growth. Thematic equity strategies must prioritize sectors aligned with both the AI-driven capital cycle and the shifting priorities of a financially strained middle class. While the S&P 500's resilience offers a floor for equity markets, investors should remain wary of overexposure to sectors reliant on higher-income discretionary spending. The path forward demands a nuanced approach-one that acknowledges the canyon between income groups and the sectors poised to bridge it.