The K-Shaped Economy Deepens as Middle East Tensions Rattle Spending
The ongoing conflict in the Middle East is testing the resilience of American consumers in divergent ways, revealing a fragile economic landscape where prosperity and pressure coexist. While higher oil prices stemming from the Iran war are straining lower-income households—who already spend a larger share of their earnings on essentials—new data suggests that wealthier Americans are also beginning to feel the economic heat, albeit from a different source: falling stock markets.
Diverging Paths: Lower-Income Strain vs. Higher-Income Stability (For Now)
Internal data from Bank of America, analyzing credit and debit card spending from the start of the war through March 21, shows the immediate impact on different income brackets. As energy costs climbed, the annual spending growth rate for lower-income households (excluding gasoline purchases) slowed noticeably. In contrast, the spending growth rate for higher-income households remained largely stable during this period.
This split underscores the solidification of a “K-shaped” recovery. Elevated spending by high-earners continues to buoy headline economic figures, while a significant portion of the population struggles with inflationary pressures. However, the stability at the top may be more vulnerable than it appears.
Sentiment Sinks Among the Wealthy, Fueled by Market Volatility
Consumer sentiment, a key forward-looking indicator, fell more than 3 points to 53.3 in March, according to the University of Michigan’s monthly survey. The decline was particularly pronounced among higher-income consumers. Survey director Joanne Hsu noted that consumers with significant stock wealth were “buffeted by both escalating gas prices and volatile financial markets in the wake of the Iran conflict,” leading to sharper sentiment drops in this group.
This sentiment shift highlights a critical vulnerability: the “wealth effect.” In recent years, a surging stock market has made high-net-worth individuals feel more secure, encouraging spending even without commensurate income gains. Now, that pillar of confidence is wobbling.
The Stock Market Correction: A Major Risk to Aggregate Spending
Goldman Sachs flagged this dynamic in a February research note, identifying a stock market correction as the single largest risk to U.S. consumer spending, which has been disproportionately propped up by upper-income households. The firm’s U.S. economist, Pierfrancesco Mei, quantified the potential GDP impact: a 10% decline in equities could reduce 2026 GDP by half a percentage point, while a 20% fall could shave a full percentage point.
As of Monday’s close, the S&P 500 was within a whisker of correction territory (10% off its 52-week high), though Tuesday’s rally provided some respite. This market turbulence is directly influencing behavior. In a Monday note, Goldman’s John Flood observed that long-only investor trading activity has been “virtually nonexistent” since the Middle East conflict began, indicating a widespread “wait-and-see” stance.
Are Higher Earners Pulling Back? Not Yet, But the Warning Signs Are Clear
Economists at Barclays, including Pooja Sriram, interpret the current data as a warning sign rather than a full retreat. “I think people are really on the sidelines now,” Sriram said, acknowledging the sentiment drop but noting, “we’re not seeing that translate into the data so far.” She attributed this to robust household balance sheets and accumulated wealth from prior years, meaning a 7-10% market correction “doesn’t necessarily make them poor by any stretch.”
However, the trajectory is concerning. The longer the conflict persists, the more prolonged the market volatility and energy price pressure could become. “Right now, it exacerbates this inequality,” Sriram stated. “Lower-income consumers are clearly starting to come under pressure, and the longer this lasts, we start getting worried about the overall risk to aggregate consumer spending.”
Uncertain Duration, Amplified Inequality
The greatest unknown remains the duration of the Iran war. A protracted conflict would likely seep further into the economic psyche of higher-income households, potentially turning a sentiment-led pullback into a spending reduction. This would create a perilous one-two punch: sustained pressure on low-wage earners from high costs, coupled with a newly cautious affluent class curtailing discretionary purchases.
The data paints a picture of an economy at a crossroads. While the wealth effect and strong balance sheets have thus far insulated high earners from a spending collapse, the confluence of geopolitical risk, market corrections, and persistent inflation is eroding their confidence. The path to a soft landing now depends heavily on whether this unease remains confined to sentiment or crystallizes into action—and on how long the conflict in the Middle East continues to cloud the economic horizon.
Correction: This story has been revised to reflect that Goldman’s Pierfrancesco Mei estimated that a 10% fall in equities could lead to a half a percentage point knock to GDP in 2026. A previous version misstated the magnitude of the potential reduction to GDP.
