Virtual Fireside Chat with Liz Ann Sonders 

The K-Shaped Economy: Why the Data and Our Experiences May Tell Different Stories

One of the first themes Chris and Liz Ann explored was the disconnect between economic and market data and the way many Americans feel about their own financial circumstances.

While markets have remained resilient, consumer sentiment has reflected considerably more anxiety. Liz Ann explained that part of this divergence can be understood through the idea of a K-shaped economy, where different segments of the population experience the same economic environment very differently.

For lower-income households in particular, inflation remains meaningful because a greater percentage of income is spent on necessities. When inflation is separated into discretionary and non-discretionary categories—or, more simply, “wants” versus “needs”—the cost of necessities continues to create pressure for many households.

This also helps explain why measures of consumer sentiment can appear much weaker than some of the underlying economic data. As Liz Ann noted, there has been a significant divergence between “soft” survey data—how consumers say they feel—and “hard” economic data measuring actual activity.

For investors, that distinction matters. Our personal experience of the economy can understandably influence how we perceive markets, but the two do not always move together.

An Economy of Rolling Expansions and Contractions

The economic cycle itself has also changed.

Rather than moving neatly from expansion to slowdown to recession and recovery, Liz Ann described an economy that has experienced rolling sectoral recessions and expansions since the pandemic.

Goods and manufacturing surged while much of the service economy was shut down. As the economy reopened, demand shifted toward services while manufacturing weakened. More recently, manufacturing has begun to recover as portions of the service economy have softened.

In other words, different areas of the economy have been strengthening and weakening at different times rather than moving together.

That rotation has also been visible in financial markets.

As Liz Ann explained, leadership has become more rotational, moving away from the more concentrated narratives that characterized portions of the previous market cycle. The changing leadership within markets in many ways reflects the changing leadership within the economy itself.

AI: Transformative Opportunity, but Expectations Matter

No discussion about today’s markets would be complete without artificial intelligence.

The extraordinary investment in AI infrastructure has become an important contributor to business investment and economic activity. But Chris and Liz Ann also explored an important question: How high have expectations become?

Liz Ann drew a distinction between today’s AI buildout and the technology and telecommunications boom of the late 1990s. During the internet era, enormous infrastructure investments were made in anticipation of demand that had not yet materialized. Today, demand for AI computing capacity is very real—and, at least thus far, spending has struggled to keep pace with it.

That does not eliminate risk.

Businesses are increasingly asking important questions about their AI investments: Where are the productivity gains? What is the return on invested capital? And how much spending is economically justified?

The technology may ultimately prove transformative while individual investments, valuations and expectations still experience periods of adjustment.

That distinction is an important one for long-term investors.

Looking Beyond the Market’s Biggest Names

The AI discussion naturally led to another important topic: market concentration.

While some of the largest technology companies continue to command enormous attention, Liz Ann noted that concentration may currently be more pronounced in earnings growth than in stock-market performance itself.

Market leadership has broadened, with significant differences emerging even among companies commonly grouped together under the same technology or AI narrative. Small-cap companies and industrials have also participated more meaningfully, illustrating that the AI story extends well beyond a handful of highly visible companies.

Chris summarized the investing implication simply: investors should be careful not to become overly enamored with one headline group of companies.

For us, it is another reminder of why diversification remains central to thoughtful portfolio construction.

From the “Great Moderation” to a More “Temperamental Era”

One of the most compelling parts of the conversation centered on what Liz Ann describes as the transition from the “Great Moderation” to a more “temperamental era.”

For much of the period from the late 1990s through early 2022, investors experienced relatively low inflation volatility, lower interest rates, increasing globalization and less monetary-policy uncertainty.

Today’s environment looks different.

Inflation has once again become a meaningful economic force. Interest rates and bond yields can react more significantly to inflation expectations, supply shocks and changing monetary policy. That can alter the traditional relationship between stocks and bonds—and potentially make diversification more nuanced than simply owning a traditional mix of the two.

Importantly, that does not mean bonds no longer have a role in a diversified portfolio. As Liz Ann emphasized, bonds can continue to provide income, lower volatility and important portfolio characteristics. At the same time, investors today have access to a broader universe of asset classes and strategies with which to build diversification.

At Gilbert & Cook, this reinforces our belief that portfolio construction should be thoughtful, dynamic and connected to each client’s broader financial plan—not simply built around a static formula.

Investing Is Not Betting

Another timely theme extended beyond economics and markets to the changing culture surrounding investing itself.

Chris and Liz Ann discussed the increasingly blurred line between investing, speculation and gambling, particularly as sports betting, prediction markets and other platforms become more prevalent.

Liz Ann offered an important distinction: investing is fundamentally about ownership and participation in wealth creation. Betting is fundamentally different—you are not an owner or participant in the underlying creation of value.

For long-term investors, that distinction matters.

Successful investing does not require predicting every headline, identifying every market turn or reacting to every new narrative. It requires understanding what you own, why you own it and how it supports the goals your wealth is intended to accomplish.

Discipline Matters More Than Prediction

That idea brought the conversation full circle.

When Chris asked what investors should be thinking about in an environment characterized by changing narratives, inflation uncertainty, shifting interest rates and rapid market rotations, Liz Ann did not recommend preparing portfolios for a particular “black swan” event or making dramatic tactical changes.

Instead, she returned to some of investing’s most enduring disciplines: diversification and rebalancing.

Periods of volatility can create opportunities to rebalance—to add where allocations have fallen below their targets and trim where they have moved above them—rather than attempting to anticipate the market’s next move.

And as the lifespan of market narratives becomes increasingly compressed, maintaining a longer-term perspective may be even more important.

As Liz Ann emphasized near the conclusion of the conversation, investors should continue to reinforce long-term disciplines and reasonably long time horizons.

That philosophy closely aligns with the way we approach investing at Gilbert & Cook.

Markets will change. Leadership will rotate. New technologies will emerge. Inflation, interest rates and investor sentiment will evolve. Our responsibility is not to predict every turn.

It is to help our clients remain grounded in a disciplined investment strategy designed around their goals, their financial plan and the life they are working to create.