Goldman Sees S&P Plunging To 5,400 In "Severe Oil Supply Shock" Scenario

For the third time in a row, Wall Street's year-end forecasts (published in the final days of the prior year) are about to be discarded on the scrap heap of financial futility. Because after everyone in late 2023 predicted a recession in 2024 only to see stocks soar, and then literally everyone predicted a stock market collapse following the liberation day drawdown only to be caught dead wrong for the second year in a row, it is now the turn of overly optimistic forecasts from late 2025 to crash and burn as the global economy crash lands into the blocked Straits of Hormuz which will not only send global GDP sliding, but could lead to a quick bear market in stocks. 

That's the warning from Goldman's new chief US equity strategist, Ben Snider (who replaced David Kostin in that role late last year). According to Snider's latest Weekly note (available to pro subs), while the baseline outlook for US equities "remains constructive" (after all, while everyone wants to cover their ass following the recent market inflation point, nobody wants to be the first to call a recession their base case) as the S&P 500 has recently traded along its average path following previous geopolitical shocks...

... the war in Iran adds to the downside risk posed by elevated valuations. How much downside?

We'll get to that in a second, but first here is Snider explaining how reality has a way of running away from the best laid out excel spreadsheets forecasting the future: 

The 5% S&P 500 decline from its January high has continued to follow the historical average equity market path following geopolitical risk events. Our baseline expectation is that the market will eventually resume its upward climb, continuing that historical pattern. However, the outlook now embeds higher oil prices, weaker US GDP growth, and later Fed easing than we and the market previously expected.

Snider hedges further, writing that while the distribution of potential outcomes is wide, "the macro headwinds in our base case outlook generally appear priced, the fundamental engine of earnings growth continues to run, and valuations — while still elevated relative to history — are less demanding than they were a few months ago."

But how is it that in a world where most asset classes are already sliding in response to the stagflationary shock that soaring oil prices will create, stocks are still just 5% below their all time high? Simple: AI capex, some $700BN of it this year, which is still propping up elevated earnings estimates. Here is Goldman:

For corporate earnings, the AI investment boom should offset the drag from modestly weaker economic activity. Recent earnings reports have reflected the ongoing strength of earnings resulting from AI investment spending, which we estimate will contribute roughly 1/3 of S&P 500 earnings growth this year. In addition, S&P 500 EPS in 2025 realized $275, modestly above our forecast. As a result, we maintain our forecasts for 12% EPS growth in 2026 ($309) and 10% growth in 2027 ($342), but those growth rates now point to a slightly higher level of earnings. An escalation of the conflict could derail the AI investment freight train, but we believe it would require a severe tightening of credit markets and a substantial decline in the operating performance of the hyperscalers.

But if Goldman is leaving its earnings estimates for this year and beyond untouched what is being revised in a note titled "Updating our US equity outlook and investment recommendations?" Why the only other thing that can be revised: the aggregate PE multiple. 

It starts with the base case: Snider writes that "by the end of 2026, there should be greater clarity surrounding the war and the trajectory of the Fed, but uncertainty surrounding the impact of AI will likely remain, maintaining pressure on valuation multiples." So adjusting for greater AI uncertainty (i.e., pretending to trim an already euphoric forecast without actually doing so), Goldman now models a year-end S&P 500 P/E multiple of 21x on consensus forward EPS, down from 22x previously. As a result, despite the increased level of expected earnings, Goldman maintains its year-end S&P 500 target of 7600.

So far so good. 

But while the base case remains unchanged, the world has moved on, and the question now is how much pain will the war in Iran inflict on both earnings estimates and PE multiples.

And this is where it gets ugly: first, there is the problem of still euphoric positioning, which Goldman frames as follows: "Equity investors face a positioning challenge as well as a fundamental one. At 0.0, our Sentiment Indicator reflects equity investor exposure that is neutral, although signs of hedging are evident. However, the combination of extremely elevated gross exposure [ZH: we explained here why gross exposure is near all time highs even as net exposure continues to decline] and crowded consensus positions has driven sharp rotations within the market. During the past few weeks, our Hedge Fund VIP basket pair has declined by 6% alongside elevated volatility in the Momentum factor."

Second - beyond mere positioning - there is, well, the war:  "The unfavorable skew to our oil price and economic forecasts, combined with the modest decline in equity prices and positioning so far, creates an unfavorable skew to the distribution of near-term outcomes for share prices." 

In English: Goldman is now forecasting two downside scenarios, both depending on how bad the supply shock from the Iran war will be:

• an ugly one: a 10% correction from the all time highs.
• a very ugly one: a 25% bear market from the highs. 

Here is Snider on the "ugly" scenario: "In a moderate growth shock scenario, we expect the S&P 500 would decline to 6300, consistent with a 1 standard deviation decline in our Sentiment Indicator and a P/E multiple of 19x." This would represent a 10% drop from the S&P's record high of 7000.

And Goldman's the worst case scenario: "An equity market decline matching the most severe oil supply shocks in recent decades would reduce the S&P 500 level by 19% from current levels to 5400, bringing the P/E multiple to 16x."

Some more details from the full report:

The major oil supply shocks of recent decades show the large potential downside risk in a severely adverse scenario. The S&P 500 declined by a median of 12% alongside rising oil prices during the oil price spikes in 1974, 1980, 1990, and 2022, and suffered a median peak to trough decline of 23% around those episodes. The oil shock following the 1979 Iranian revolution was a notable outlier, with Fed easing helping lift the S&P 500 during the spike in oil prices, but the market ultimately declined in 1981 as the economy fell into recession. However, as our rates strategists have noted, the current labor market and inflation backdrop create a less challenging environment than during the previous oil price spikes. In addition, the lower oil intensity of the US economy and higher US oil production further reduce the risk from an oil supply shock today. Our economists estimate that US GDP growth would register nearly 2% on a Q4/Q4 basis in 2026 even in an extreme scenario where a 60-day disruption to flows lifted oil prices to a March average of $145.

Why does Goldman now tacitly expect a painful bear market in its worst case scenario? Because "higher oil and greater uncertainty cut short the cyclical economic acceleration underpinning many of our investment recommendations heading into 2026."

Worse, while a near-term resolution to the conflict would likely drive a sharp rebound in cyclical equities, the window of opportunity for cyclical trades predicated on a 1H 2026 economic acceleration is quickly closing. The outlook appears more attractive for stocks with acyclical secular growth profiles and ‘quality’ attributes.

Finally, those wondering how to trade on this Goldman report (which we would not recommend and instead urge readers to follow what Goldman's prop traders have to say), the bank's investment recommendations include solar energy stocks, cybersecurity stocks relative to the broad software industry, and the Materials and Health Care sectors. Snider says that The beneficiaries of AI investment spending remain the clearest near-term opportunity in the AI complex, although crowding is a risk, and the end of the cyclical trade is one of three key catalysts we have highlighted for the hyperscalers to regain momentum.

Much more in the full note available to pro subs