Another 19% Drop? Goldman Sachs Warns: If Oil Price Shock Persists, S&P 500's Worst-Case Scenario Could Fall to 5400 Points

Wall Street’s year-end forecasts have repeatedly missed the mark, and now the overly optimistic predictions for the end of 2025 are being “called out” again due to Iran shocks. Goldman Sachs’ latest report shows that in an extreme scenario, the S&P 500 could fall another 19% from current levels, reaching 5,400 points.

On Monday, Goldman Sachs’ Chief US Equity Strategist Ben Snider stated in the latest weekly report that although the baseline scenario remains relatively optimistic, the risks of downside are significantly increasing due to Iran war escalation combined with high oil prices. Goldman Sachs outlined two concerning downside scenarios:

In a moderate growth shock, the S&P 500 could fall to 6,300; if oil prices surge to their most severe levels in decades, the index could drop 19% from current levels to 5,400, with the price-to-earnings ratio compressing to 16 times.

Goldman Sachs believes that current equity investors face dual challenges of positioning and fundamentals. Although the S&P 500 is only about 5% below its all-time high, elevated overall exposure and crowded consensus positions have led to intense internal rotation. Hedge fund VIP basket portfolios have declined 6% over the past few weeks, with momentum factor volatility rising sharply.

The baseline target remains unchanged, but valuation assumptions have quietly been lowered

In this report, Goldman Sachs maintains its year-end target for the S&P 500 at 7,600, but the internal logic supporting this target has been adjusted:

• Lowered P/E expectations: Year-end expected P/E ratio reduced from 22x to 21x (based on consensus forward EPS);

• Earnings expectations raised as a hedge: Actual 2025 EPS for the S&P 500 is estimated at $275, slightly above expectations, so Goldman Sachs maintains its forecasts of 12% EPS growth in 2026 ($309) and 10% in 2027 ($342);

• AI capital expenditure 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, effectively offsetting the drag from weakening economic activity.

Snider pointed out that by the end of 2026, the market will have clearer judgments on the war’s trajectory and the Federal Reserve’s path, but uncertainties around AI will continue to suppress valuation multiples.

Two downside scenarios: from “bad” to “very bad”

Goldman Sachs explicitly quantifies two downside scenarios, with key variables indicating the extent of oil supply shocks caused by the Iran conflict.

Mild impact scenario: Under a “moderate growth shock” assumption, Goldman Sachs expects the S&P 500 to fall to 6,300, corresponding to a P/E of 19x, about 10% below the all-time high of 7,000, with sentiment indicators showing a one standard deviation decline.

Severe impact scenario: If oil prices surge to their most severe levels in decades, the S&P 500 could drop 19% from current levels to 5,400, with the P/E ratio compressing to 16x.

Historical data from Goldman Sachs shows that during oil price surges in 1974, 1980, 1990, and 2022, the median decline in the S&P 500 was 12%, with a median peak-to-trough drop of 23%. Notably, the oil shock following the 1979 Iranian Revolution was an exception—Federal Reserve rate cuts temporarily boosted stocks, but the market ultimately declined sharply during the 1981 recession.

Goldman Sachs economists estimate that even in an extreme scenario—such as a 60-day disruption of the Strait of Hormuz with oil prices averaging $145 in March—US GDP growth in Q4 2026 could still approach 2% year-over-year. The report also notes that the US economy’s dependence on oil has significantly decreased, and increased domestic oil production has somewhat buffered supply shocks.

Positioning risks are not to be ignored, and the cyclical trading window is closing

Goldman Sachs’ report emphasizes that current market fragility is driven not only by fundamentals but also by positioning structures.

The report shows Goldman Sachs’ sentiment indicator at 0.0, reflecting a neutral overall exposure among equity investors, but signs of hedging are already evident. More concerning is that total exposure remains very high, while net exposure continues to decline, leading to intense internal rotation within the market.

Strategically, Goldman Sachs believes that if conflicts are resolved in the short term, cyclical stocks could rebound quickly. However, the cyclical trading window, which assumes economic acceleration in the first half of 2026, is rapidly narrowing.

Risk warnings and disclaimers

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.