The S&P 500 valuation multiples have already "peaked" and started to decline. Goldman Sachs: The market may be approaching a "growth shock" scenario.

The S&P 500 Index has fallen 9% from its January high, but the contraction of valuation multiples is far greater than the index itself—its price-to-earnings ratio has already entered the "correction" zone.

According to Zhui Feng Trading Desk, Goldman Sachs' latest weekly strategy report warns that the current market is increasingly resembling the previously outlined "growth shock" scenario. If geopolitical conflict continues to escalate, US stocks still face further downside risk.

With the combined pressures of soaring oil prices, rising interest rates, and geopolitical uncertainty, the S&P 500’s forward 12-month P/E dropped sharply from 22 times a month ago to 19 times, a decline of 14%. Meanwhile, the yield on the 10-year US Treasury rose about 50 basis points, reaching the 2-standard-deviation threshold usually associated with US stock sell-offs. Notably, although the P/E compressed sharply, the expansion of the equity risk premium was relatively limited.

Goldman Sachs' US Equity Sentiment Indicator fell to -0.9 this week, the lowest since August 2025, reflecting that investors are significantly cutting stock exposure. Historical data shows that when the indicator falls below -1, it often signals above-average stock returns, but the signal is more reliable when it breaks below -1.5. Goldman notes that without improvement in fundamentals, the current positioning is not enough to drive the market higher.

Valuation has already "peaked," markets approaching the "growth shock" threshold

The S&P 500 Index has dropped 9% since its all-time high on January 27, but the decline in P/E has been even steeper—from 22 times on January 27 to the current 19 times, a drop of 14%, which has entered the technical "correction" zone. In contrast, analysts have actually raised their 2026 earnings per share forecasts during this sell-off, with an accumulated increase of 3% in the past month.

The Goldman report points out that both the current S&P 500 level and sentiment indicator are approaching the levels set in the prior "growth shock" scenario, and the recent outcome distribution is shifting toward being favorable for equity investors. However, Goldman’s cyclical-versus-defensive sector ratio and dividend futures pricing indicate that economic growth expectations have only been trimmed slightly in recent weeks; instead, the sharp rise in interest rates is the main macro driver of the sell-off.

Goldman warns that if conflict continues to escalate and drags on the economic outlook, the stock market still has further downside. Referencing the S&P 500 declines during severe historical oil supply shocks, the index could fall to 5,400 points, about 15% lower than current levels.

Fundamentals: AI investment supports 40% earnings growth, oil shock limited impact

From a fundamentals perspective, Goldman maintains its baseline forecast for the S&P 500 in 2026: 12% per-share earnings growth, reaching $309. The top-down model shows that each 1 percentage point change in US real GDP growth translates to about 3–4% change in S&P 500 per-share earnings, while each 10% change in oil prices only impacts earnings by roughly 0.4%. This means earnings are not highly sensitive to oil prices; a bigger risk is that severe, sustained supply disruptions materially drag on economic growth.

Goldman economists currently base their scenario on the assumption that the flow of oil through the Strait of Hormuz stays at 5% of normal for six weeks, Brent crude ends the year at $80 per barrel, and US real GDP growth (Q4 year-over-year) is 2.1%. Even in the worst-case scenario—with oil prices surging above $150 per barrel, supply disruption lasting until May with damaged capacity—economists still expect US real GDP growth to exceed 1%. Goldman estimates a 30% probability of a US recession in the next 12 months; if a recession occurs at the historical average level, S&P 500 earnings per share will drop to $239.

AI investment spending is the key variable supporting earnings. Goldman estimates AI infrastructure investment will contribute about 40% of this year’s per-share earnings growth for the S&P 500. Micron recently released forward EPS guidance that is 60% higher than both Goldman and market consensus expectations, and the subsequent consensus upgrades add about 2 percentage points of support to the S&P 500’s 2026 per-share earnings growth.

Q1 earnings season: Technology leads growth, management guidance more critical than results

Consensus forecasts show S&P 500 Q1 earnings per share growing 12% year-over-year; if achieved, this would mark the sixth consecutive quarter of double-digit growth, the longest streak in the post-global-financial-crisis earnings recovery. Earnings season officially kicks off the week of April 13, with about 60% of S&P 500 market capitalization reporting in the final two weeks of April.

At the sector level, information technology is expected to see EPS growth of 44% year-over-year, contributing 87% of the S&P 500’s Q1 earnings growth. NVIDIA and Micron together are expected to contribute more than 50% of the S&P 500's Q1 earnings growth. The capex trends of the hyperscale cloud computing firms are the central focus this quarter—analysts expect their Q1 total capital expenditures to reach $149 billion, up 92% year-over-year, but growth will slow in subsequent quarters. Over the past 12 months, hyperscale firms’ free cash flow has dropped 32% year-over-year, and the signals of AI investment returns will draw intense investor scrutiny.

Goldman notes that in the current macro volatility, management guidance and forward-looking commentary will be more informative than reported results. According to Q1 2025 earnings season experience, in a volatile macro environment, the stock price boost from positive earnings surprises is often below the historical average, and individual stock volatility around earnings days also declines accordingly.

Beyond technology: Margin pressure and "wait-and-see" sentiment coexist

Outside the technology sector, the core issue for investors this quarter is how much rising energy costs and supply chain disruptions erode corporate margins. S&P 500 net margin hit a record high in Q4 2025, but surveys show that even before the conflicts broke out, companies were already concerned about rising raw material input costs, while price increase expectations remained moderate—a combination that challenges margin outlook. Consensus forecasts indicate S&P 500 net margin will slightly retreat from Q4’s record high in Q1.

For companies with early reported results, the signals are mostly positive. Since March, 32 S&P 500 constituent companies have reported earnings; analysts raised the median 2026 EPS forecast by 0.5% for these companies. Most management teams have adopted a "wait-and-see" stance toward geopolitical uncertainty, with few companies providing clear forward guidance. Goldman believes management commentary and guidance in upcoming reports will be a more important source of information for judging corporate earnings prospects.

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The above content is from Zhui Feng Trading Desk.

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