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The worrying 'K' on the U.S. stock market
12/12/2025
The operating profits of the S&P 500 and overall economic profits are decoupling
Our Chart of the Week illustrates the annual changes in two pivotal profit indicators in the U.S. The first is the operating profits of S&P 500 companies. The second is total corporate profits, as reported in national macroeconomic data after taxes, excluding valuation and depreciation adjustments. For decades, both series moved largely in lockstep, reflecting the close link between the stock market and the real economy. Since the pandemic, however, this close correlation seems to have broken down. S&P 500 operating profits have fluctuated much more widely for about a year and have been dynamic, while overall economic profits seem to be lagging behind.
We see clear reasons for this divide. A few large technology companies are driving up profits in the S&P 500, supported by economies of scale and huge investments in AI (artificial intelligence.) By contrast, the macro profit data reflect the broad corporate base of the U.S. economy, and therefore many smaller, interest-sensitive companies that are suffering from higher financing costs and increased unit labor costs.
A further factor is share buybacks, which support the index's big players without macroeconomic profits rising to the same extent. In summary, S&P profits reflect the strength of a few extremely large, competitive companies, while broad corporate profits reflect the 'average U.S. company' at a time of solid but not high growth.
According to Johannes Müller, Head of Research at DWS, this development reflects a 'revival of the K'. During the coronavirus pandemic the idea of the K became popular among economists to illustrate that one part of the economy was virtually unaffected by the pandemic or even thrived, while the other part struggled considerably – as with the letter K, one line went up, the other down. Historically, the U.S. stock market has tended to develop in parallel with the economy. For example, there is a correlation between newly created jobs and the S&P 500. 'Since the end of 2022, however, the labor market has shown signs of weakening momentum, while the S&P 500 has continued to rise — by more than 75%,' says Müller. In his estimation, this is 'a classic K-shaped formation'. It has been triggered this time by AI euphoria following the launch of ChatGPT, combined with huge investments in data centers. But it remains to be seen whether these heavy expenditures will be justified by productivity gains in the foreseeable future.
A K-shaped development can also be observed within the AI ecosystem: While companies from the Google universe have recently seen strong gains, parts of the OpenAI ecosystem have recorded price losses. This is because new models are emerging, and market leadership is volatile. For the stock market this may suggest that buy-and-hold strategies for individual AI-focused companies may involve significant risk. Going forward, a key factor may be which companies can use AI to deliver measurable benefits, and which ones fall by the wayside.
Our Chart of the Week illustrates how profit paths are diverging. K-logic applies not only to the economy and the stock market, but also to the evolution of profits. In our opinion, selection, diversification and constant reappraisal of one’s assumptions remains essential. Without evidence that the trillions invested in AI are increasing macroeconomic productivity, a market that is already heavily dependent on gains by a small number of companies will become still more vulnerable.
Increasing divergence between U.S. stock performance and profits in the real economy
Sources: Haver Analytics; DWS Investment GmbH as of 12/9/25
* Total corporate profits after taxes, excluding valuation and depreciation adjustments, as reported in the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Alternative investments may be speculative and involve significant risks including illiquidity, heightened potential for loss and lack of transparency. Alternatives are not suitable for all clients.