Market Update: Why K-Shaped Economy Economist Is Avoiding Stocks Amid Iran-War Inflation – Full Analysis

The professor who first warned the US about a K-shaped economy is raising another red flag: the stock market may be too optimistic about the Iran war.

As a result, Peter Atwater — the economist often credited with popularizing the idea of a bifurcated recovery where high earners thrive while lower-income people struggle — says he’s steering clear of US stocks.

Atwater says that investors are underpricing a scenario where American businesses are punished abroad because of how inflationary the Iran war has been.

“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,” the president of Financial Insyghts told Bloomberg this week.

There’s no evidence that the US will be blamed for the inflationary impact of the war, but America’s global reputation has already declined in the past year amid trade concerns and rising geopolitical tensions. Ratings of the US fell across 15 nations in the year leading up to the spring of 2025, according to a study from the Pew Research Center.

American firms have also been threatened abroad, with Iran’s Revolutionary Guard saying it considered US tech businesses operating in the Middle East as “legitimate targets” for retaliation.

“I worry about the implications to American businesses that operate globally,” he added. “I think that we have unknowingly created a moment where there’s a lot that America can and will be blamed for that is in no way reflected in current market prices.”

The Iran war has dragged stocks through a month of volatility, but the benchmark indexes aren’t that far away from all-time highs. In the heat of the sell-off, the Dow and Nasdaq 100 dropped as much as 10% from their recent peaks, while the S&P 500 was just shy of entering an official correction.

Economic concerns surrounding the war, meanwhile, have grown louder the longer the conflict has dragged on. The market’s dominant worry is that higher oil prices could stoke inflation. That could later weigh on consumers, hitting growth at a time when the US economy was already slowing down.

The economic impact of higher oil prices could be particularly dire on the lower-income cohort, Atwater said. He speculated that affording food would become a bigger concern for lower-income households, both in the US and abroad, as the ripple effects of the Iran war work their way through the economy.

The closure of the Strait of Hormuz has also impacted other commodities, such as fertilizer, which is expected to increase food costs.

“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 said, referring to uprisings in the Middle East in the early 2010s.

Concerns about the economic damage stemming from the Iran war have grown louder the longer the conflict has gone on, but investors are growing more optimistic the war will soon draw to a close. The major indexes popped after President Trump said on Truth Social that Iran had asked the US for a ceasefire, leading some investors to bet on a rebound.