The K-Shaped Conundrum
- Andrew Thompson
- 1 day ago
- 8 min read
Updated: 3 hours ago
Behind the curves of the K-shaped economy lies a profound transformation. 2026 will be a pivotal year for the United States as it navigates a complex economic and geopolitical landscape. The dual challenge is clear: strengthen Main Street America without triggering destabilising policy shifts, while preserving the wealth effect that underpins U.S. equity markets. At the same time, addressing strategic vulnerabilities. Success in these areas will not only shape market performance but also define America’s position on the world stage for decades to come. Let’s dig in.
U.S. midterm elections, held halfway through a presidential term, are crucial because they decide control of Congress, shaping the legislative agenda and influencing the president’s ability to govern. All 435 House seats and about one-third of Senate seats are contested, along with many state and local offices, making midterms a key indicator of public sentiment. The next midterms will take place on November 3, 2026. Recent polling shows a near tie nationally, with Democrats at 40% and Republicans at 39%, though older voters lean more Republican, suggesting a competitive landscape heading into 2026. President Trump has much to do and, no doubt, has some big cards to play.
The American economy will be the biggest battleground. A K-shaped economy describes a recovery where different parts of the economy rebound at very different rates, creating a split in outcomes. After a downturn, some sectors, such as technology and finance, and higher-income individuals recover quickly and even thrive, forming the upward arm of the “K.” Meanwhile, other sectors like hospitality and retail, along with lower-income groups, continue to struggle or decline, forming the downward arm. This pattern highlights growing inequality, as prosperity rises for some while others face prolonged hardship. Some commentators have even suggested a 21st century feudal system has been created with extremes being more obvious – wealth and poverty. These sectors often face slower recovery compared to technology, finance, and e-commerce, which thrive in digital and remote environments.
Typically, younger workers (Millennials and Gen Z) are hit hardest because they are overrepresented in service jobs and entry-level positions in struggling sectors, while older, wealthier generations (typically Baby Boomer age groups) often benefit from rising asset values in property and investments, widening the economic gap.
As of 2025, Baby Boomers (now aged between 61 and 79 years old) hold about 41% of U.S. residential real estate, making them the largest property-owning generation. Generation X (now aged 45 to 60) owns roughly 30%, while Millennials account for around 21%, despite representing a larger share of the home-owning-age population. Gen Z (now aged 13 to 28) has only a small slice—estimated at under 10% of housing wealth—reflecting their younger age and later entry into the market. This imbalance highlights how Boomers dominate property ownership, while younger generations face affordability challenges and delayed homeownership.
In the U.S. equity markets, Baby Boomers dominate ownership, controlling approximately 54% of all corporate stocks and mutual fund assets despite comprising about 21% of the population. The “wealth effect” in America is real and powerful. Around $35 trillion of savings ride the valuation curves of stocks and real estate daily. The Trump administration simply cannot afford to implement policies that disrupt the wealth effect in any meaningful way. Doing so would freeze consumer confidence (the power of America’s consumption must not be underestimated) sending real asset values lower and would likely trigger a recession at home and abroad - re-election probabilities would be rendered stillborn in the process.
Recent elections in the U.S. have seen a shift toward socialist-leaning candidates in states like New York where a left-leaning candidate was elected and in Florida where the socialist candidate narrowly missed being elected. Economic inequality, rising housing and healthcare costs, and generational frustration are the main causes of voter disquiet. Urban areas with diverse, younger populations amplify these preferences, while grassroots movements and social media have successfully mobilised support by framing affordability and equity as urgent priorities.
To counter the effects of a K-shaped economy and appeal to voters ahead of the 2026 midterms, President Trump is likely to focus on policies that directly support struggling sectors and working-class households. Initiatives such as targeted tax relief for lower- and middle-income families, expanded child tax credits, and payroll tax reductions would help ease financial pressure on those hit hardest by inflation and stagnant wages. Large-scale infrastructure and domestic manufacturing investments could create jobs in industries that have lagged, while affordable housing programmes could also assist. This would address rising housing costs, a major concern notably for Millennials and Gen Z.
Additionally, Donald Trump could propose measures to reduce healthcare costs without embracing full government control, such as lowering prescription drug prices and manufacturing America’s pharmaceuticals at home rather than in China, as at present, and expanding affordable health insurance options. Supporting small businesses with low-interest loans and grants, would help sectors on the downward slope of the K-shaped recovery. Finally, a strong energy and inflation strategy, focused on boosting domestic energy production and stabilising fuel prices would resonate with voters worried about cost-of-living increases and the price of “gas at the pump”. Together, these policies would signal a commitment to inclusive growth, potentially broadening his appeal beyond his traditional base.
President Trump’s response to the K-shaped economy has a high probability of being radical. Income taxes cut to very low levels or even abolished for lower-paid and younger workers altogether, with the tax revenue gap being filled by trade tariffs. He is likely to increase onshoring and factories built at home, paid for by foreign firms – automotive firms, drug manufacturing firms and the super-critical building of home infrastructure to process rare earth materials.
The United States now finds itself in an awkward position, facing a significant strategic vulnerability. China possesses a substantial share of global rare earth raw materials. More importantly, China controls around 85% of the world’s capacity to process these materials into the essential components that power digital infrastructure and drive global development. Commercially, economically, and militarily, rare earth production is largely in China’s hands, creating a critical strategic weakness for the U.S. The Pentagon and technology hyperscalers have a weakness. Both need China’s rare earth processing capabilities, badly. As kinetic warfare is reinvented in Ukraine, and Silicon Valley races to maintain its A.I. lead, China’s rare earth and therefore battery dominance is raising alarms in the White House. The problem “isn’t digging the stuff up. It’s turning it into magnets for EVs, missiles, and wind turbines”. Even U.S.-mined rare earth material normally get sent to China for processing.
President Trump is deeply concerned about this imbalance and is determined to address it. However, the build-out and its eventual payoff will not be measured in months. Significant investment in midstream and downstream development, particularly in energy and rare earth processing is essential if America is to reduce its strategic dependence on China.
The chart highlights China’s dominance in the production of essential rare earths.
Chart 1. Chinese rare earth production continues to dwarf efforts elsewhere (Financial Times, 2022). Source: https://ig.ft.com/rare-earths/.
President Trump’s onshoring and industrial rebuild policies will create more domestic manufacturing jobs, boosting employment for blue-collar workers. These initiatives will revitalise traditional industries, offering higher wages and greater job security in sectors like steel, refining, automotive and energy. It is possible the initiative will go some way to relieving stresses in the K-shaped economy. This would clearly need to be a strategic plan, with ultimate benefits felt long beyond the Trump presidency. Will President Trump attempt to amend the law to permit a third term in office, enabling him to carry his plans through to completion?
If you accept the premise that America has no viable alternative but to make strides towards the active removal of its strategic weakness, you will also recognise the multi-year nature of the rebuild. The industrial renaissance will surely include more debt and more greenhouse emissions. As wages go up for blue collar workers, inflation must be controlled. However, a positive halo will be even stronger GDP which is likely to overspill and benefit the rest of the world. The American infrastructure rebuild would certainly help fuel economic growth sufficient to “outrun the debt juggernaut”. A 21st century re-run of the debt-fuelled boom of the 1940s and 50s. The alternative is further and deeper reliance upon China for provision of essential rare earth materials and everyday manufactured goods – effectively delivering control over U.S. development and ultimately the U.S. military whose arsenal increasingly relies upon modern technology.
This narrative is not here to blueprint your portfolio. Instead, think of it as a peek behind the curtain - an invitation to explore our first impressions and emerging ideas.
Let’s consider some investment consequences. With $10 trillion in debt due for refinancing in 2026 and a growing shift from long-term to short-term borrowing, the Trump administration arguably has few alternatives. Avoiding longer duration bonds – as real values fall under the colossal weight of debt and financialisaton. The ubiquitous 60/40 equity/bond portfolio will make way for one closer to a 60/20/20 shape, where fixed income allocations move to shorter duration and the inclusion of commodities and other forms of alternative assets will come to the fore. Equities and gold (a large chunk of the commodity basket) will continue to make good investment sense. Equity themes such as technology, AI implications across multiple sectors will remain important factors. Fiat currency debasement and the upwards push of security prices (if not value) remain a key consideration. Interest rates will be driven lower, and yield curve control will play an important role, much as it did in 1940s and 50s America.
The chart below, courtesy of Fidelity, shows the makeup of a typical 60/40 and a 60/20/20 portfolio.
Chart 2. Rethinking the 60/40 Portfolio and Diversification Strategy (Fidelity, 2025). Source: https://www.fidelity.com/
Watch for a potential resurgence of inflation, particularly if oil and gas prices rise sharply. Much will be done to keep energy prices in check. The U.S. is expected to continue supporting reshoring initiatives, raw materials processing and AI development. Meanwhile, alongside longer-duration bonds, the dollar is likely to depreciate. The Dollar Index is expected to weaken further, which historically signals strong performance for global equities, including emerging markets.
Federal Reserve-backed stablecoins will likely launch in 2026 serving as a digital extension of the U.S. dollar, reinforcing monetary policy, safeguarding financial stability, and aiming to preserving the dollar’s global reserve currency dominance. By offering a secure, regulated alternative to private tokens, they promise faster payments, greater transparency, and a foundation for innovation - all while keeping systemic risks in check.
What could accelerate this economic transformation are ‘moonshot’ projects such as thorium fusion and quantum computing. It’s worth noting that America holds the largest gold reserves of any nation, valued on the books far below their market price. If a revaluation were agreed, it could inject roughly $1 trillion of additional firepower into the Treasury General Account.
America stands at a crossroads in 2026, facing a generational wealth divide, mounting debt, and a strategic reliance on China that threatens its global leadership. President Trump’s bold agenda, including reshoring, industrial renaissance, and radical tax reform, signals a seismic shift toward inclusive growth and economic resilience. For investors, this is more than policy; it is a catalyst for opportunity. Expect structural change to fuel innovation in AI, energy, and manufacturing, while portfolio strategies evolve toward shorter-duration bonds, commodities, and global equities. The next chapter of U.S. economic history will be written by those who anticipate these trends and position themselves to capture the upside of transformation.
All sources Bloomberg unless otherwise stated.
