The S&P 500 index has fallen 9% from its January peak, but the contraction in valuation multiples has far exceeded the index itself—the price-to-earnings (P/E) ratio has already entered a technical "correction" zone.
According to tracking data, the latest weekly strategy report from Goldman Sachs warns that current market trends are increasingly aligning with a previously outlined "growth shock" scenario. If geopolitical conflicts continue to escalate, U.S. stocks still face further downside risks.
A combination of three pressures—soaring oil prices, rising interest rates, and geopolitical uncertainty—has caused the forward 12-month P/E ratio for the S&P 500 to plummet from 22x a month ago to 19x, a drop of 14%. Concurrently, the 10-year U.S. Treasury yield has surged approximately 50 basis points, reaching a threshold of two standard deviations above its mean—a level typically associated with equity sell-offs. Notably, despite the sharp compression in the P/E ratio, the expansion in the equity risk premium has been relatively limited.
Goldman Sachs' U.S. Equity Sentiment Indicator fell to -0.9 this week, its lowest level since August 2025, reflecting that investors are significantly reducing their equity exposure. Historical data shows that when this indicator falls below -1, it often precedes above-average stock returns, although the signal is more reliable when it drops below -1.5. Goldman Sachs points out that, without an improvement in the fundamental outlook, the current positioning levels are insufficient to drive the market higher.
Valuations have led the decline from their peak, bringing the market closer to a "growth shock" tipping point. Since hitting a record high on January 27, the S&P 500 has fallen 9%, but the decline in the P/E ratio has been more severe—dropping from 22x on January 27 to the current 19x, a 14% decline, placing it in a technical "correction." In contrast, analysts have actually raised their 2026 earnings per share (EPS) forecasts during this sell-off, with cumulative upward revisions of 3% over the past month.
Goldman Sachs' report notes that both the current level of the S&P 500 and the sentiment indicator reading are approaching the levels set in the "growth shock" scenario. The recent distribution of outcomes is improving in a direction favorable to equity investors. However, Goldman's cyclical vs. defensive sector relative valuation measure, along with dividend futures pricing, indicate that the market's pricing of economic growth has only been slightly downgraded over recent weeks. The sharp rise in interest rates is identified as the primary macro driver of this sell-off.
Goldman Sachs warns that if conflicts continue to escalate and weigh on the economic outlook, equities still have further downside potential. Drawing parallels to historical periods of severe oil supply shocks, the index could potentially fall to around 5400 points, approximately 15% below current levels.
From a fundamental perspective, Goldman Sachs maintains its baseline forecast for 2026 S&P 500 EPS growth of 12%, reaching $309. The firm's top-down model indicates that a 1 percentage point change in U.S. real GDP growth corresponds to approximately a 3-4% change in S&P 500 EPS, while a 10% change in oil prices affects EPS by only about 0.4%. This suggests earnings are not highly sensitive to oil prices; the greater risk lies in severe and sustained supply disruptions that could substantially drag on economic growth.
Goldman Sachs economists' current baseline scenario assumes Hormuz Strait oil flows remain at 5% of normal levels for 6 weeks, Brent crude ends the year at $80 per barrel, and U.S. real GDP growth (Q4/Q4) is 2.1%. Even in the most adverse scenario—oil prices surging above $150 per barrel, disruptions lasting until May, and damage to production capacity—economists still project U.S. real GDP growth to exceed 1%. Goldman Sachs estimates the probability of a U.S. recession within the next 12 months at 30%. Should a recession of historical average magnitude occur, S&P 500 EPS would fall to $239.
AI investment spending is a key variable supporting earnings. Goldman Sachs estimates that AI infrastructure investment will contribute about 40% of the S&P 500's EPS growth this year. Micron's recent forward EPS guidance exceeded both Goldman Sachs' and consensus estimates by 60%. Subsequent consensus estimate upgrades following this guidance have effectively added about 2 percentage points of support to the 2026 S&P 500 EPS growth rate.
Consensus forecasts indicate S&P 500 Q1 EPS growth of 12% year-over-year. If achieved, this would mark the sixth consecutive quarter of double-digit growth, the longest such streak since the post-global financial crisis earnings recovery. Earnings season officially begins the week of April 13th, with approximately 60% of the S&P 500's market capitalization reporting results in the final two weeks of April.
At the sector level, the Information Technology sector is projected to see EPS growth of 44% year-over-year, contributing 87% of the S&P 500's total Q1 earnings growth. NVIDIA and Micron alone are expected to contribute over 50% of the index's Q1 earnings growth. The trajectory of capital expenditure by hyper-scale cloud providers will be a core focus this quarter—analysts expect their total Q1 capex to reach $149 billion, up 92% year-over-year, but growth is projected to decelerate quarter-by-quarter thereafter. Hyper-scalers' free cash flow over the past 12 months has already declined 32% year-over-year, making signals regarding the return on AI investments a key focus for investors.
Goldman Sachs notes that, against the current backdrop of macro volatility, management guidance and forward-looking commentary will carry more informational value than reported results. Drawing on the experience of the Q1 2025 earnings season, during periods of macro volatility, the positive stock price impact of earnings beats tends to be below historical averages, and the concentration of stock-specific volatility around earnings dates correspondingly decreases.
Outside the tech sector, a core question for investors this quarter is the extent to which rising energy costs and supply chain disruptions are eroding corporate profit margins. The S&P 500 net profit margin reached a record high in Q4 2025. However, survey data indicates that even before the conflict erupted, companies were expressing concerns about rising input costs, while pricing expectations remained relatively modest—a combination that poses challenges for the margin outlook. Consensus forecasts suggest the Q1 S&P 500 net profit margin will decline slightly from the Q4 record high.
Early signals from companies that have already reported are somewhat positive. Since March, 32 S&P 500 companies have reported earnings, and the median analyst revision to their 2026 EPS forecasts has been an upward adjustment of 0.5%. Most management teams are adopting a "wait-and-see" stance regarding geopolitical uncertainty, with few providing explicit forward guidance. Goldman Sachs believes that management commentary and guidance in subsequent reports will be a more critical source of information for assessing corporate earnings prospects.
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