Research shows that the stock market decline caused by Middle East conflicts will shrink American household wealth by $1.5 trillion

Pantheon Macroeconomics predicts this week that the stock market decline caused by the Middle East conflict could lead to a $1.5 trillion reduction in U.S. household wealth in the first quarter of this year, marking the most severe drop since the inflation-driven bear market lows of 2022.

In a report to clients on Tuesday, the company stated that this would result in a $50 billion decrease in American consumer spending.

Research from the Federal Reserve in 2025 shows that for every additional dollar of wealth Americans gain, their consumption increases by $0.035. However, Pantheon notes that because more people are now paying attention to the stock market than before, the impact of stock price fluctuations could be greater.

“Google Trends data shows that in April 2025, online searches for the term ‘stock market’ were more than twice as high as in May 2022, when markets were hit by soaring inflation and interest rates, despite the decline in stock prices being similar to that of May 2022,” wrote Samuel Thoms, Chief U.S. Economist at Pantheon, in the report. “Therefore, the decline in wealth in the first quarter could have a larger impact on consumption than what decades of data suggest.”

Thoms stated that some industries sensitive to discretionary spending, such as leisure services, hotels, and restaurants, will suffer significant profit declines.

Thoms wrote, “Overall, it would be surprising if non-mandatory service spending remains stable in the coming months. Household cash flow is being squeezed by rising gasoline prices, and there is also a negative ‘wealth effect’ at play, with deteriorating consumer confidence clearly visible in Morning Consult’s daily data.”

“Therefore, although larger-than-usual tax refunds are currently helping households, we still expect consumer spending growth to slow this year,” he added.

Ultimately, as corporate profits lag, reduced spending could feedback and impact stock market performance. Thoms indicated that the current tightening of spending should reduce investors’ expectations for interest rates.

He wrote, “There is a high likelihood that economic growth will slow in the second quarter.”