Wall Street's year-end forecasts have repeatedly missed the mark, and now overly optimistic projections for late 2025 are being challenged again due to the Iran crisis. A recent report from Goldman Sachs indicates that, under an extreme scenario, the S&P 500 could fall an additional 19% from current levels to 5400 points.
In a weekly note released Monday, Ben Snider, Goldman Sachs' chief US equity strategist, pointed out that while the base case scenario remains relatively optimistic, downside risks are significantly expanding due to the Iran conflict coupled with high oil prices. The firm outlined two concerning downside scenarios:
In a moderate growth shock scenario, the S&P 500 would decline to 6300 points. If the oil price shock reaches the severity of the most serious episodes in recent decades, the index could drop 19% from current levels to 5400 points, corresponding to a compression of the price-to-earnings ratio to 16 times.
Goldman Sachs believes equity investors currently face challenges from both positioning and fundamentals. Although the S&P 500 is only down about 5% from its all-time high, elevated gross exposure and crowded consensus positioning have led to intense internal market rotation. The hedge fund VIP basket has fallen 6% over recent weeks, with momentum factor volatility noticeably increasing.
The base case year-end target for the S&P 500 remains unchanged at 7600 points, but the underlying valuation assumptions have been subtly adjusted.
The expected year-end price-to-earnings ratio has been revised down from 22 times to 21 times, based on consensus forward earnings per share estimates. This reduction is partially offset by an upward revision to profit expectations. Actual S&P 500 earnings per share for 2025 reached $275, slightly exceeding expectations. Consequently, Goldman Sachs maintains its forecast for 12% EPS growth in 2026 to $309 and 10% growth in 2027 to $342.
Artificial intelligence capital expenditure is identified as a key pillar. The approximately $700 billion AI investment boom this year is expected to contribute about one-third of the S&P 500's earnings growth for the year, effectively offsetting the drag from weaker economic activity.
Snider noted that by the end of 2026, the market will have a clearer view on the trajectory of the conflict and the Federal Reserve's policy path, but uncertainty surrounding AI will continue to weigh on valuation multiples.
The report explicitly quantifies two downside scenarios, with the core variable being the severity of the oil supply shock triggered by the Iran conflict.
In the moderate shock scenario, under a "medium growth shock" assumption, Goldman Sachs expects the S&P 500 to fall to 6300 points, corresponding to a P/E ratio of 19 times. This represents a decline of approximately 10% from the historical high of 7000 points, accompanied by a one standard deviation drop in sentiment indicators.
In the severe shock scenario, if the oil price shock reaches the most severe levels seen in recent decades, the S&P 500 could drop 19% from current levels to 5400 points, with the P/E ratio compressed to 16 times.
Historical data from Goldman Sachs shows that during oil price spikes in 1974, 1980, 1990, and 2022, the median decline for the S&P 500 was 12%, while the median peak-to-trough decline was 23%. Notably, the oil shock following the 1979 Iranian Revolution was an exception, where Federal Reserve rate cuts initially propped up the market, but stocks eventually fell sharply when the economy entered a recession in 1981.
Goldman Sachs economists estimate that even in an extreme scenario involving a 60-day disruption of the Strait of Hormuz and an average oil price of $145 per barrel in March, US GDP growth could still approach 2% year-over-year by the fourth quarter of 2026. The report also notes that the US economy's dependence on oil has significantly decreased, and increased domestic oil production provides some buffer against supply shocks.
The report specifically emphasizes that the current market's vulnerability stems not only from fundamentals but also from positioning risks.
Goldman Sachs' sentiment indicator currently reads 0.0, indicating that overall equity investor exposure is at a neutral level, but signs of hedging are emerging. More notably, gross exposure remains extremely high while net exposure continues to decline. This combination is causing unusually sharp rotations within the market.
From a strategy perspective, Goldman Sachs believes that if the conflict is resolved in the short term, cyclical stocks could experience a rapid rebound. However, the window for cyclical trades predicated on economic acceleration in the first half of 2026 is rapidly narrowing.
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