Capital Markets Update #13

We hear this all the time: the economy is K-Shaped.  Within this statement exists a hypothesis masquerading as fact, which is that today’s brand of capitalism somehow choses winners and losers.  In doing so, this hypothesis de facto asserts that America’s economy disproportionately supports a select few at the expense of the masses.  To a large extent, this discussion has rung ephemeral within the political sphere.  But the honest question we have tried to answer is whether there is real truth behind the assertion.  In order to do so, we’ve looked at the US economy across three vectors: socioeconomic mobility, empirical wage and wealth data, and wealth accretion opportunities across income classes.  Ultimately, we attempt reach a conclusion around whether lower and middle income consumers suffer from an unfair disadvantage as compared to their higher-income compatriots across these three main vectors. 

Socioeconomic mobility is a tough one to pin down as it often gets so political.  The primary contributors to socioeconomic mobility within society are access to quality education, intergenerational wealth transfer and family structure (perhaps not ironically – the value of a two-parent household).  This comes from a National Academies of Sciences and Engineering peer reviewed study.  According to the National Center for Education Statistics, the US spends between $16.5k and $18.5k/year per K–12 student as of 2023, with total national spending on K-12 education exceeding $1.0T in 2025 (US Public Education Statistics data).  According to the OECD, that’s the fifth-highest per-student education budget in the world, trailing only Luxembourg, Norway, Austria and Korea.  Education spending per student has increased by approximately 36% from 2002 – 2023, after adjusting for inflation.  However, despite the fortune spent, national test score averages across K-12 students in both reading and math have declined by approximately 3% over the most comparable testing period (2004 – 2023, National Center for Education Statistics data).  Beyond K-12 education, the Federal Government has increased its collegiate student loan book from $0.5T in 2006 to $1.8T in 2024 (Education Data Initiative).  In effect, if you want to go to college, there is generally money available to do so.  Looking at the home environment, the percentage of children living with two parents has remained relatively flat over the analysis period, rising from about 69% in 2002 to 71% in 2023.  However, from 2002 to 2023, median household net worth has increased from $44,000 to $150,000 (FRED).  So, what gives?  Our view is that socioeconomic mobility remains achievable; the American Dream is alive and well.  But, it must be earned.  The data shows that the average student is receiving a significantly more expensive education, while benefitting from a consistently secure and materially wealthier home environment, without progressing whatsoever in school.  Someone needs to take responsibility for this failure and it’s likely not the US government (see spending stats) or the US economy (see net worth, household stats).  In all likelihood, it’s the students themselves, with some shared responsibility resting with the teachers and parents.  We say this because data tells us that the democratization of information, emphasized by access to the internet, coupled with ample educational opportunities and a dramatic lift in living standards should lead to better student performance.  Ergo, long-term socioeconomic mobility.  But, unfortunately it just hasn’t.

Wage and wealth data paint a definitive picture of a US economy which has created historic income and wealth gains across the various income stratifications. By total asset value, the preponderance of wealth gains remain concentrated amongst households with equity market exposure (both residential and public equities).  There are so many ways to look at this, here’s what we chose.  The US Census publishes an annual table which shows the distribution of households across various inflation-adjusted income stratifications.  For example, what percentage of households bring home $50-$75k/year vs over $200k/year as of 2024?  The historical strats are inflation adjusted, so you can compare various points of time effectively and basically monitor socioeconomic mobility throughout the years.  The data shows that the percentage of households earning over $200k in today’s dollars has risen from 8.6% in 2002 to 16.0% in 2023.  Again, to be clear, the inflation adjustment factors in that the 2002 equivalent of $200k today would have been about $115k.  This is fantastic data.  Households earning $150k - $200k/year in today’s dollars has increased from 8.5% to 10.1%.    What’s interesting is that the “middle income earner” distribution has remained relatively flat historically.  Upon reflection, this makes all the sense in the world given this data is inflation adjusted.  What we want to see is more households concentrated in the upper earning tiers and fewer households concentrated in the lower earning tiers, and thankfully that’s exactly what we get. For instance, the percent of households earning between $25k - $50k/year (2024 dollars) has decreased from 19.9% to 16.7% while households earning less than $25k/year has dropped from 16.7% to 13.5%.  Similarly, the Fed provides wealth data by income distribution.  Middle-income households (representing households earning incomes within 40% - 80% tranche of all income earners) have seen their wealth grow from $12.1T in 2002 to $35.5T today.  The true middle income trance (from 40% - 60% of income earners) has seen its wealth grow from $4.4T in 2002 to $13.5T today.   Interestingly, even earners within the 20% - 40% distribution have seen wealth expansion from $2.6T to $7.2T today.   The point is pretty clear: there is no such thing as equality of outcome within a capitalist society; but, all should benefit within a functioning capitalist society.  For instance, according to the ECB, the bottom 50% of Eurozone constituents have seen household net worth grow a mere 85% from 2009 to 2025, while the bottom 40% of US earners (significantly more conservative stat) have seen net worth grow by 125% over the same period.  The bottom 60% of US income earners have seen 175% wealth expansion over the same period.  Think about that, that’s double the EU. 

Wealth accretion opportunities are relatively straightforward – all individuals have access to the opportunity to accrete wealth, while the majority have the capacity (in the form of actual discretionary income after expenses) to save.  According to the US Census, average annual household expenditures in 2024 were approximately $78.5k.  According to the same dataset, average household income was $104,000.  Given both are averages, not medians, we can use the dataset.  The average household could have saved approximately $26k/year in 2024.  However, if you dig into the census data, the $78.5k of expenses includes $9.2k worth of life insurance and pension contributions.  So, in reality, your average household can take home nearly $34k worth of savings value each year.  Given FinTech has provided nearly ubiquitous, easy, and instantaneous access to excellent savings tools, there is no reason why the average American household should not benefit today from the market wealth effect in the same manner as upper-income earners have for the last 40 years.  Let’s use this “average household” budget referenced in the Census as an example.  Assuming this household saves $20k/year religiously and doesn’t take money out, earning an average of 10% per year in the markets, their stock portfolio would be worth $635k in 15 years.  That is lifechanging for a family, so we utterly disagree that wealth aggregation is reserved for upper income earners alone.  The data fundamentally does not support this assertion.

In conclusion, while we recognize an equal distribution of income or wealth does not exist within a capitalist society, we assert there to be equal opportunity.  The K-Shaped economy that exists today is largely a function the study habits, collegiate major and annual savings choices made by individuals 20 years ago.  You can poke holes in that, but the data we’ve provided bears this out, we believe.  Sure, idiosyncratic examples exist everywhere.  But, on average, Americans across all income thresholds have seen a meaningful improvement in quality of life over the last 20 years – both on a standalone, statistical basis, and in comparison to other developed nations.