Iran War: 'K-Economy' Economist Warns on Stocks

Economist Cites Global Backlash Risk

Peter Atwater, the economist credited with popularizing the concept of a K-shaped economic recovery – where high earners thrive while lower-income individuals struggle – is raising concerns about the stock market’s optimism regarding the Iran war. He is currently steering clear of US stocks.

Inflation and Blame for Rising Costs

Atwater believes investors are underpricing the potential for American businesses to be negatively impacted internationally due to the inflationary pressures stemming from the conflict. “The reason I wouldn't be buying is, I don't think yet the investors have fully appreciated what I think is today, is the biggest consequence of the war, and that is the degree to which America will be blamed by others around the world for a much higher cost of living,” Atwater told Bloomberg this week.

Declining US Global Reputation

While there is no concrete evidence the US will be directly blamed for the war’s inflationary impact, America’s global reputation has been declining. A Pew Research Center study revealed that ratings of the US fell across 15 nations in the year leading up to spring 2025.

Threats to US Businesses Abroad

Adding to these concerns, Iran’s Revolutionary Guard has threatened US tech businesses operating in the Middle East, labeling them as “legitimate targets” for retaliation. Atwater expressed worry about the implications for American businesses with global operations.

Market Volatility and Economic Concerns

The Iran war has already triggered a month of volatility in the stock market, though benchmark indexes remain relatively close to all-time highs. During the recent sell-off, the Dow and Nasdaq 100 experienced declines of up to 10% from their recent peaks, while the S&P 500 nearly entered a correction.

Impact on Lower-Income Households

A key concern is the potential for higher oil prices to fuel inflation, which could negatively impact consumer spending and slow down the US economy. Atwater specifically highlighted the potential dire consequences for lower-income households, predicting increased difficulty in affording basic necessities like food.

Ripple Effects on Food Costs

The conflict has also disrupted the flow of commodities, including fertilizer, leading to anticipated increases in food costs. Atwater emphasized the importance of ensuring access to food for those at the bottom of the economic spectrum, referencing the Arab Spring uprisings as a potential outcome of widespread food insecurity. “One of the things that I pay very close attention to is the ability of those at the bottom to feed themselves. And we know that is a growing issue, and I would hate to see a repeat of the Arab Spring,” he stated.

Optimism Following Ceasefire Talk

Despite growing economic concerns, investor optimism has increased following reports that Iran has requested a ceasefire from the US. This led to a positive market reaction, with major indexes rising after President Trump announced this development on Truth Social, prompting some investors to anticipate a market rebound.