Wall Street's year-end predictions have repeatedly missed the mark, and the overly optimistic forecasts released for the end of 2025 are once again being &#34;slapped in the face&#34; due to the impact of Iran. Goldman Sachs' latest report indicates that under extreme scenarios, the S&amp;P 500 index could drop another 19% from current levels, reaching 5,400 points.
On Monday, Goldman Sachs' Chief U.S. Equity Strategist Ben Snider pointed out in the latest weekly report that although the baseline scenario remains relatively optimistic, the downward risks brought about by the Iran war combined with high oil prices are significantly expanding. Goldman Sachs provided two alarming downside scenarios:
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Under moderate growth shocks, the S&amp;P 500 could fall to 6,300 points; if the oil price shock reaches the most severe level in decades, the index would drop 19% from current levels to 5,400 points, corresponding to a price-to-earnings ratio compression to 16 times.
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Goldman Sachs believes that current stock investors are facing dual challenges from both positioning and fundamentals. Although the S&amp;P 500 is currently only about 5% below its historical peak, the high total exposure and crowded consensus positions have led to significant internal market rotations, with hedge fund VIP basket portfolios dropping 6% over the past few weeks and momentum factor volatility significantly increasing.
<h2>Baseline target remains unchanged, but valuation assumptions have quietly been adjusted</h2>
In this report, Goldman Sachs maintains its year-end target price for the S&amp;P 500 at 7,600 points, but the internal logic supporting this target has been adjusted:
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Earnings multiple expectations lowered: Year-end expected price-to-earnings ratio has been revised down from 22 times to 21 times (based on consensus expected forward EPS);
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Earnings expectations adjusted upward as a hedge: The actual earnings per share (EPS) for the S&amp;P 500 in 2025 is expected to be $275, slightly exceeding expectations, thus Goldman Sachs maintains its forecast of 12% EPS growth in 2026 ($309) and 10% growth in 2027 ($342);
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AI capital expenditure is a key pillar: This year's approximately $700 billion AI investment boom is expected to contribute about one-third of the S&amp;P 500's earnings growth this year, effectively offsetting the drag from weakening economic activity.
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Snider noted that by the end of 2026, the market will have a clearer judgment on the trajectory of the war and the Federal Reserve's path, but the uncertainty surrounding AI will continue to suppress valuation multiples.
<h2>Two downside scenarios: from &#34;ugly&#34; to &#34;very ugly&#34;</h2>
Goldman Sachs has clearly quantified two downside scenarios in the report, with core variables pointing to the extent of the oil supply shock triggered by the Iran war.
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Moderate shock scenario: Under the &#34;moderate growth shock&#34; assumption, Goldman Sachs expects the S&amp;P 500 to fall to 6,300 points, corresponding to a price-to-earnings ratio of 19 times, which is about a 10% drop from the historical peak of 7,000 points, while sentiment indicators will show a one standard deviation decline.
Severe shock scenario: If the oil price shock reaches the most severe level in decades, the S&amp;P 500 would drop 19% from current levels to 5,400 points, with the price-to-earnings ratio compressing to 16 times.
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Goldman Sachs' historical data shows that during the oil price surges in 1974, 1980, 1990, and 2022, the median decline of the S&amp;P 500 was 12%, while the median decline from peak to trough reached 23%. It is worth noting that the oil shock following the 1979 Iranian Revolution was an exception—while the Federal Reserve's interest rate cuts temporarily supported the stock market, it ultimately fell sharply in 1981 when the economy entered a recession
Goldman Sachs economists estimate that even in extreme scenarios—such as a 60-day disruption in the Strait of Hormuz and an average oil price of $145 in March—the U.S. GDP growth rate could still approach 2% year-on-year in the fourth quarter of 2026. The report also points out that the U.S. economy's dependence on oil has significantly decreased, and the increase in domestic oil production has somewhat mitigated the impact of supply shocks.
<h2>Position risk cannot be ignored, and the cyclical trading window is closing</h2>
Goldman's report particularly emphasizes that the current market vulnerability stems not only from fundamentals but also from the position structure, which poses a hidden danger.
The report shows that Goldman's sentiment indicator currently reads 0.0, reflecting that stock investors' overall exposure is at a neutral level, but signs of hedging have already emerged. More concerning is that total exposure remains at a very high level, while net exposure continues to decline, leading to unusually intense internal rotation in the market.
From a strategic perspective, Goldman believes that if the conflict is resolved in the short term, cyclical stocks may experience a rapid rebound, but the cyclical trading window, predicated on an economic acceleration in the first half of 2026, is rapidly narrowing

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Goldman Sachs' latest report sounds the alarm, warning that the Iran war combined with oil price shocks could lead to a 19% drop in the S&P 500 from current levels to 5,400 points, with the price-to-earnings ratio compressing to 16 times. Although the year-end target price remains unchanged at 7,600 points, internal valuation assumptions have quietly been adjusted downward. The current capital expenditure boom is still supporting profit expectations, but high valuations combined with geopolitical risks are rapidly deteriorating the risk-reward ratio

- Goldman Sachs has issued a report highlighting potential downturns for the S&P 500 due to the Iranian conflict and high oil prices, forecasting a possible drop to 5,400 points, a 19% decline.  
- The report outlines two scenarios: a moderate growth impact could see the index fall to 6,300 points, while a severe oil price shock could lead to the more drastic prediction.  
- Although maintaining a year-end target of 7,600 points, estimates for the price-to-earnings ratio have been adjusted downwards amid rising uncertainty around geopolitical risks and economic conditions.

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Another drop of 19%? Goldman Sachs warns: If the oil price shock continues, the worst-case scenario for the S&P 500 could fall to 5,400 points