Third-quarter results point to a divided economy

As more consumer-facing companies prepare to release third-quarter earnings this week, Wall Street is closely watching for evidence that the U.S. economy is continuing to split in two, with spending patterns dividing sharply between higher- and lower-income households. A growing number of indicators suggest that affluent Americans are maintaining or increasing their spending, while lower-income consumers are cutting back significantly. Those reductions have been driven by the prolonged pressure of rising prices on basic goods. September’s consumer price index report showed a 0.3% monthly increase, putting annual inflation at 3%.

Following that data, the Federal Reserve last Wednesday approved its second consecutive interest rate cut, bringing its benchmark overnight borrowing rate down to a range of 3.75% to 4.00%.

At the same time, the U.S. has entered the fifth week of the federal government shutdown, leaving many government workers without pay and adding further strain to household budgets.

According to the Census Bureau, 35.9 million people were living in poverty in 2024, based on the latest available figures. For a family of four, the weighted average poverty threshold was $32,130. By comparison, median household income reached $83,730 last year. The top 10% of households saw income rise 4.2% between 2023 and 2024, while the bottom 10% saw no meaningful gains. Roughly 33 million households fall into each of those income groups.

Higher-income Americans have benefited from stock market gains and rising home values. JPMorgan’s Cost of Living Survey indicated that those consumers also reported stronger confidence in economic conditions looking ahead to next year.

Recent earnings reports show that companies across sectors are beginning to feel this tightening divide. In the week ahead, businesses including Yum Brands, McDonald’s, E.l.f. Beauty, Tapestry and Under Armour are set to publish their results, and analysts expect many of them to reflect similar trends.

Last week, Chipotle reported that customers earning less than $100,000 a year — around 40% of its total customers — are buying less frequently because of concerns about the broader economy and inflation. The company saw a 0.8% decline in traffic during the quarter. Coca-Cola said its third-quarter growth was driven by higher-priced brands such as Topo Chico sparkling water and Fairlife protein shakes. Procter & Gamble also reported stronger demand from wealthier shoppers, noting that higher-income customers are purchasing more from club stores that offer larger package sizes, while lower-income consumers have scaled back.

Some companies reporting this week have already signaled similar patterns. In September, McDonald’s CEO Chris Kempczinski told CNBC that the company expanded its value menu in response to what he described as a “two-tier economy.” He said traffic from lower-income consumers has fallen by double digits as some customers are skipping meals or choosing to eat at home.

The trend goes beyond food. In the auto sector, consumers who can afford new vehicles continue buying them at strong levels, while more price-sensitive buyers are holding back. Defaults and repossessions are rising, even as the average price of a new vehicle reaches record highs. Meanwhile, in hospitality, Hilton recently reported weaker performance among its budget-friendly brands while its luxury business remains exceptionally strong. However, CEO Christopher Nassetta told CNBC he expects the separation to fade over time. He said he anticipates a major shift heading into the fourth quarter and into next year, with the middle and lower segments improving rather than the high end weakening.