KKR’s Henry McVey sees earnings and economic growth concentrated in a handful of areas—and everything else left in the dust.
Call it the Dickens economy: It is the best of times and the worst of times, depending on who you are, and the gulf between the two only looks to widen.
We’ve all heard of the K-shaped recovery, in which the richest Americans’ wealth and spending keeps heading higher, while everyone else’s trajectory is lower. Yet that paradigm is likely to apply to entire sectors of the market, says KKR’s Head of Global Macro & Asset Allocation Henry McVey: He calls it the divergence conundrum, in which earnings and economic growth is concentrated in just a handful of areas—with everything else left in the dust.
Dickens is an apt spokesperson, since the last time we’ve seen a divergence this extreme was at the start of the second industrial revolution in the 1870s, he says in KKR’s midyear outlook, published on Wednesday. And intensifying competition means we will increasingly be in “an investing landscape where certain segments of the economy and markets are starved for capital, while others are flush with attractive financing options.”
Not surprisingly, tech makes it in the winner’s camp.
If the sector has any skeptics left after its blistering run, it’s those that think that at some point, tech stocks have gotten ahead of themselves. Even following recent selloffs, the iShares Semiconductor exchange-traded fund has soared almost 80% year to date and the State Street Technology Select Sector SPDR ETF is up nearly 23%; the S&P 500 is up about 6% so far in 2026, largely on the back of tech.
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Yet McVey points to the 1870s–as well as the 1920s and 1990s–as evidence that “this concentration may go on longer than many investors think.” That is particularly true given his belief that “we are still in the early stages of AI productivity positively impacting corporate profits,” meaning there should be plenty of ongoing enterprise demand for the technology over time. Add in the fact that conditions are still supportive of equities moving higher, and it seems likely that tech can keep making gains.
Likewise, the war in Iran is just the latest symptom of a world that’s moving “from a kind of benign globalization to one of great power competition,” he says, where nations will want to control their own supplies of key things like semiconductors, energy, and critical minerals for security reasons. Tech will inevitably play a part in this: “How can you feel like you are winning in national security if you’re not winning in AI?” as McVey puts it.
Defense spending will likely increase, but cybersecurity will matter just as much as physical security. After all, digitization means that tech is now enmeshed with the rule of law, trade, and economics. “It’s increasingly hard to separate the private sector from the public sector,” McVey says.
Overall however, the fundamental case for stocks remains strong earnings growth, and on that front, the outlook for the next 12 months looks robust. Year-over-year comparisons do get tougher toward the end of 2027, but that’s at least in part an “embarrassment of riches, since growth rates right now are pretty stellar.”
The world is far from perfect, but as far as problems go, that’s a good one for stocks to have.
Write to Teresa.Rivas@Barron’s.com