Navigating the Great Bifurcation: An AI Boom and a Consumer Bust
The third quarter has concluded against a backdrop of profound contradiction. On the surface, equity markets, particularly in the U.S., continue to be propelled forward, fueled by a technological arms race that promises to reshape productivity. Yet, beneath this headline strength, the foundation of the broad economy is showing significant fractures. We are not operating in a single economy, but rather in a deeply bifurcated one, defined by two starkly different realities: one for the affluent, who are benefiting from an AI-driven asset boom, and one for the lower-income majority, who are facing an intensifying struggle for affordability.
The AI-Fueled Engine: Prosperity and Peril
The engine driving this top-tier prosperity is, without question, the generative artificial intelligence revolution. The market’s largest components are no longer just promising AI; they are spending at a staggering, unprecedented rate to build it. This quarter, Meta Platforms announced its capital expenditures for 2025 will soar to between $70 billion and $72 billion, with expenses expected to climb further in 2026, all to feed its AI ambitions. This comes even as it beat sales estimates, posting $51.2 billion in Q3 revenue.
This trend is not isolated. Alphabet (Google) shattered expectations, with sales hitting $87.5 billion and its Google Cloud unit—a primary vehicle for AI deployment—beating profit estimates by nearly 20% with $3.59 billion in operating income. In response, Alphabet is raising its full-year capital expenditure forecast to as high as $93 billion. Similarly, Microsoft reported a massive 39% currency-adjusted revenue gain in its Azure cloud unit, crushing estimates. To achieve this, its capital spending in the first quarter alone hit $34.9 billion, a stunning increase from $24 billion in the prior quarter.
This colossal spending is not a speculative bubble; it is translating into tangible, massive profits. These earnings results are what continue to fuel the stock market’s upward momentum. However, this momentum is critically dependent on the continuation of this unprecedented spending cycle. Any slowdown in this AI-related capital expenditure, whether due to market saturation, regulatory hurdles, or a reassessment of returns, represents a primary and significant risk to the market’s current valuations. Furthermore, we are observing an increasing level of webbed, circular transactions that warrant caution. In several instances, the AI component suppliers and cloud giants are also acting as investors in their own customers, particularly AI startups. This dynamic, where investment capital flows from a provider, only to be returned as revenue for its services, creates a self-reinforcing loop. It recalls similar arrangements seen during the tech boom of the late 1990s, which can inflate revenue figures and mask true, organic demand.
Below the Surface: The Squeezed Consumer
For investors and the affluent households who hold the vast majority of these assets, the “wealth effect” is real. As their portfolios swell, their balance sheets remain strong, allowing them to sustain spending patterns despite broader inflationary pressures. But this top-line strength masks a troubling reality for the other, larger part of the economy. While the Federal Reserve just delivered a 25-basis point rate cut—bringing the benchmark rate to a 3.75%-4.00% range—it was a “hawkish cut” at best. Chairman Powell’s comments that a December cut is “far from a foregone conclusion” and the 10-2 split vote reveal a committee deeply divided. This policy uncertainty provides little relief for the lower-income consumer, who is being crushed not by hypothetical future risk, but by the very real cost of living and servicing debt today.
This distress is no longer anecdotal; it is flashing bright red across the credit markets. We are seeing bankruptcies among lenders that service this exact demographic, such as PrimaLend Capital (subprime auto) and Tricolor (low-income auto loans). PROG Holdings, which caters to customers lacking traditional credit, just cut its revenue outlook, citing “heightened financial stress” among its clients. This stress is echoed in the data: over 6% of subprime auto loans are now severely delinquent—the highest rate on record—and vehicle repossessions surged to 1.73 million last year.
The strain is visible everywhere. A recent survey found 25% of “buy now, pay later” consumers are using these installment plans for groceries, a staggering jump from 14% last year. This is not discretionary spending—it is a sign of desperation. The housing market remains a locked door for most, with the National Association of Home Builders reporting that over 70% of U.S. households cannot afford a median-priced new home.
The Bifurcation Appears in Earnings
Corporate bellwethers are now explicitly calling out this bifurcation. Procter & Gamble and Coca-Cola executives have both noted the split. They see affluent consumers buying larger, premium-sized packs while their financially stressed customers are seeking smaller sizes and value formats, leading Coke to introduce “mini single-serve cans” to capture the affordability-focused buyer. This is a clear adaptation to a fractured consumer base.
This split is evident across sectors. O’Reilly Automotive notes that, while its revenue targets are holding, some customers are delaying major car repairs. Hotel chains like Hilton and Wyndham are seeing softness in their budget brands, forcing them to discount. Toymakers Mattel and Hasbro reported steep sales drops as retailers, fearing a cautious consumer, delay holiday orders. Tellingly, Hasbro was saved only by its gaming division, which caters to wealthier consumers.
Navigating the Divide
As investors, we must navigate this “Tale of Two Consumers” with extreme care. The momentum behind the AI-driven tech giants is undeniable and continues to present a powerful growth opportunity. However, we must remain keenly aware of the risks under a unified market hood, from the sustainability of the capex boom to the circular nature of its funding. At the same time, we must be equally, if not more, cautious about businesses that rely on the discretionary spending of the lower- or middle-income consumer. The widening chasm between the “haves” and the “have-nots” is no longer just a social issue—it is the central risk and defining feature of the current investment landscape.
Birthdays:
Actor Harry Hamlin turns 74 today, newscaster Andrea Mitchell is 79, actress Nia Long is 55 and actor Henry “The Fonz” Winkler turns 80.
Christopher Gildea 610-260-2235