Rising corporate profits, falling wages drive K-shaped economy

If you aren't yet familiar with the term "K-shaped economy," it will become inescapable in 2026, according to a new report from Bank of America.

A K-shaped economy is a situation in which, following a downturn, the economy recovers in an unequal manner. Specifically, higher-income employees and industries thrive due to rising asset prices, while lower-income employees and industries are burdened with inflation, debt, and weak growth.

The K-shaped economy is the latest financial buzzword for a reason: Multiple signs of a bifurcated economy have already emerged.

On Tuesday, Feb. 17, shares of cereal and snacks maker General Mills fell 7% after the company cut its outlook due to "weak consumer sentiment, heightened uncertainty, and significant volatility."

The company had expected to grow organic net sales up to 1% this year. Now it expects them to decline between 1.5% and 2% in 2026.

Persistent inflation, SNAP benefit reductions, and geopolitical considerations "have led to significant consumer stress, especially for the middle- and lower-income groups," according to the company.

But while General Mills is seeing signs of stress for lower income consumers, analysts at Bank of America are seeing signs that corporate profits are set to rise in 2026.

Increased worker productivity helps fuel K-shaped economy

As the average American worker struggles, big corporations benefit from some of the highest worker productivity in years.

According to Bank of America, since the Covid pandemic, national accounts data have shown a sustained increase in productivity easily reflected in rising corporate profits.

Related: Layoffs in January reach recession-era levels

However, at the same time corporate profits are rising, labor income has steadily fallen as a share of U.S. GDP, creating the K shape that could define the U.S. economy for the forseeable future.

"For now, higher profits relative to wages are yet another driver of a K-shaped economy, as higher-income consumers tend to be more exposed," according to BofA Securities.

"Measured labor productivity (that is, output per hour) continues improving since the end of the pandemic and is mostly concentrated in the services sectors rather than manufacturing. Interestingly, real labor income is not growing at the same pace," according to BofA.

"In other words, productivity gains translate into higher corporate profits. This dynamic implies a higher share of the GDP pie going into corporate profits relative to labor income."

U.S. job cuts jump in January, reach highest total since 2009

Market watchers hoping to gain some early jobs momentum from the first month of the new year will have to look elsewhere, as U.S.-based employers more than doubled the number of January job cuts from last year.

Employers revealed 108,435 job cuts last month, an 118% increase from the fewer than 50,000 announced a year ago, and a 205% increase from the 35,553 let go in December.

Related: Salesforce quietly cuts hundreds in AI-related layoffs

While the cuts affected many industries, 70% of the layoffs came from just four.

• Transportation: The industry cut 31,243 jobs, with most of that total coming after UPS announced it would cut 30,000 jobs following its split with Amazon.
• Technology: Tech companies announced 22,291 job cuts in January, with most of those attributed to Amazon, which plans 16,000 layoffs. “CEO Andy Jassy, like many CEOs recently, has said AI will cost jobs in the coming years, but this cut appears to be due more to over-hiring and reducing layers than to the new technology,” said Andy Challenger in a Jan. 2026 job cuts report from Challenger, Gray, & Christmas. Pinterest also announced it will lay off hundreds of employees later this month.
• Health care: The health care industry announced 17,107 job cuts in January, its worst month since April 2020, when it announced 19,453. “Healthcare providers and hospital systems are grappling with inflation and high labor costs. Lower reimbursements from Medicaid and Medicare are also hitting hospital systems. These pressures are leading to job cuts, as well as other cutting measures, such as some pay and benefits,” said Challenger.
• Chemical: Chemical manufacturers announced more than 4,700 job cuts in January, with Dow Inc.’s big layoff announcement accounting for most of that total. It was the industry’s highest monthly total since February 2016.

January job cuts were the worst they’ve been since 2009, when 241,749 jobs were axed. It was also the worst monthly total since October 2025, when 153,074 layoffs were recorded.

But job cuts and layoffs are just one half of the employment picture. The other half is hiring, and the U.S. economy is struggling in that area as well.

The U.S. jobs market created only 64,000 jobs in November as the unemployment rate rose to 4.6%.

While that rate fell marginally to 4.5% in December, the lack of job creation and hiring seems to be another economic sore point in early 2026.

Employers announced 5,306 hiring plans in January, the lowest total for the month since Challenger began tracking hiring plans in 2009. Prior to last month, the lowest total on record for January was in 2023, when 5,376 hiring plans were announced.

Related: AI productivity has an 'intense' downside, new study says