Drop another 19%? Goldman Sachs warns: If the oil price shock persists, the S&P 500 could fall to 5,400 points in the worst-case scenario.

Wall Street’s year-end forecasts have repeatedly missed the mark, and now the overly optimistic predictions for the end of 2025 are again being “slapped in the face” due to the Iran shock. Goldman Sachs’ latest report shows that, in an extreme scenario, the S&P 500 index could fall another 19% from current levels, reaching 5400 points.

On Monday, Goldman Sachs U.S. equity chief strategist Ben Snider pointed out in his weekly report that although the baseline scenario remains relatively optimistic, the downside risks posed by the Iran war combined with high oil prices are expanding significantly. Goldman Sachs presented two alarming downside cases:

Under a moderate growth shock, the S&P 500 falls to 6300 points; if the oil price shock reaches the severest level seen in decades, the index will drop 19% from current levels to 5400 points, with the price-to-earnings ratio compressed to 16 times.

Goldman Sachs believes that equity investors currently face both position and fundamental dual challenges. Although the S&P 500 is only about 5% below its historical high, high overall exposure and crowded consensus positions have led to intense internal rotation in the market. The hedge fund VIP basket fell 6% in recent weeks, and momentum factor volatility has noticeably increased.

Baseline target unchanged, but valuation assumptions quietly lowered

Goldman Sachs maintains its S&P 500 year-end target of 7600 points in this report, but the internal logic supporting the target has been adjusted:

Lowered P/E assumptions: The year-end expected price-to-earnings ratio is lowered from 22 times to 21 times (based on consensus expected forward EPS);Upward revision in earnings to offset: S&P 500’s 2025 actual EPS is projected to reach $275, slightly above expectations. Thus, Goldman Sachs maintains forecasts of 12% EPS growth in 2026 ($309), and 10% growth in 2027 ($342);AI capital expenditure as a key pillar: This year’s AI investment boom of roughly $700 billion is expected to contribute about one-third of the S&P 500’s profit growth this year, effectively offsetting the drag from weaker economic activity.

Snider pointed out that by the end of 2026, the market will have a clearer view on the course of the war and the Fed’s path, but uncertainty around AI will continue to pressure valuation multiples.

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

Goldman Sachs quantifies two downside scenarios in the report, with the core variable being the degree of oil supply disruption triggered by the Iran war.

Moderate shock scenario: Under a “medium growth shock” assumption, Goldman Sachs expects the S&P 500 will fall to 6300 points, with a P/E ratio of 19 times, equivalent to a drop of about 10% from the historical high of 7000 points. At the same time, sentiment indicators will fall by 1 standard deviation.

Severe shock scenario: If the oil price shock reaches the severest levels seen in decades, the S&P 500 will fall 19% from current levels to 5400 points, with P/E compressed to 16 times.

Goldman Sachs’ historical data show that during oil price spikes in 1974, 1980, 1990, and 2022, the median S&P 500 drop was 12%, while the median peak-to-trough drop was 23%. Notably, the oil shock after the 1979 Iranian revolution was an exception—Fed rate cuts temporarily propped up stocks, but the market ultimately plunged in 1981 as the economy fell into recession.

Goldman Sachs economists estimate that even in extreme scenarios—such as a 60-day blockade of the Strait of Hormuz and average oil prices rising to $145 in March—U.S. GDP growth in Q4 2026 could still reach nearly 2% year-over-year. The report also notes that U.S. dependence on oil has decreased significantly, and increased domestic oil production helps buffer the impact of supply shocks.

Position risk cannot be ignored, cyclical trading window is closing

Goldman Sachs’ report highlights that the current market fragility stems not only from fundamentals, but also from position structure risks.

The report shows Goldman’s sentiment indicator currently reads 0.0, reflecting that equity investor exposures are at a neutral level overall, but signs of hedging have appeared. More noteworthy, overall exposure remains extremely high, while net exposure continues to decline, resulting in abnormal internal market rotation.

Strategically, Goldman Sachs believes that if the conflict is resolved in the short term, cyclical stocks may rebound quickly. However, the window for cyclical trades based on the premise of economic acceleration in the first half of 2026 is rapidly closing.

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