A severe disruption to global oil supplies stemming from the intensifying Middle East conflict could push U.S. equities into a sharp correction this year, analysts at Goldman Sachs warned, highlighting how the war involving Iran is emerging as a major risk for global financial markets.
In a downside scenario where oil supply shocks intensify and economic growth slows, Goldman said the benchmark S&P 500 could fall to around 5,400, implying a drop of roughly 19% from current levels. The index last closed at 6,632.19 on Friday, leaving markets near historically elevated valuations even as geopolitical tensions escalate.
The warning underscores growing concern among investors that the conflict could quickly spill over from energy markets into broader financial conditions, affecting inflation, corporate earnings, and global growth prospects.
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The key risk outlined by Goldman centers on potential disruptions to energy flows through the strategically critical Strait of Hormuz, the narrow shipping corridor between Iran and Oman that carries roughly 20% of the world’s oil and liquefied natural gas shipments.
Interruption to shipping in the strait has triggered a major supply shock, pushing crude prices significantly higher and amplifying inflation pressures worldwide. Oil prices have already surged above $100 per barrel, rising sharply since the conflict escalated following military strikes involving the United States and Israel.
Energy analysts have warned that if the conflict broadens or shipping disruptions worsen, prices could climb further, raising the cost of fuel, transportation, and industrial production across global economies. For equity markets, that scenario could translate into weaker consumer spending, tighter financial conditions, and lower corporate profit margins.
Goldman outlined several scenarios to illustrate how markets could react depending on the scale of the economic impact. Under a moderate U.S. economic growth shock, the firm expects the S&P 500 to fall to about 6,300, representing a decline of nearly 5% from current levels.
While less dramatic than the severe oil disruption scenario, the drop would still represent a meaningful pullback for a market that has enjoyed a strong rally driven by technology stocks and investor enthusiasm for artificial intelligence.
The bank said that despite the risks, the baseline outlook for U.S. equities remains broadly constructive.
“The baseline outlook for U.S. equities remains constructive, but the war in Iran adds to the downside risk posed by elevated valuations,” Goldman said in its analysis.
AI Investment Boom Provides Partial Support
One factor cushioning the outlook for equities is the ongoing surge in corporate investment tied to artificial intelligence. Technology companies have been pouring billions of dollars into data centers, semiconductors, and cloud infrastructure to support AI development, creating a powerful investment cycle that has helped lift earnings expectations and market sentiment.
Goldman said the AI investment boom could offset some of the drag from modestly weaker economic activity, helping limit the scale of any downturn in the broader market. However, the bank also cautioned that the rapid rise of AI introduces its own uncertainties, including questions about how the technology will reshape industries, employment, and long-term productivity.
Reflecting the evolving risks, Goldman Sachs adjusted its valuation outlook for U.S. equities. The bank lowered its year-end forward price-to-earnings ratio forecast for the S&P 500 to 21, down from a previous estimate of 22, citing uncertainty surrounding the economic impact of AI and geopolitical tensions.
Under more adverse scenarios, valuations could compress even further.
Goldman said that if the U.S. economy experiences moderate growth disruption, the forward P/E ratio could fall to 19, while a severe oil supply shock could drive it down to 16, levels that would significantly reduce equity valuations even without a sharp drop in earnings.
This type of multiple contraction has historically played a major role in market corrections, particularly during periods of geopolitical instability or rapid inflation.
The warning also points to the fact that U.S. equities are trading near historically high valuations following years of strong gains. Much of the rally has been concentrated in large technology companies benefiting from the AI boom, leaving markets increasingly sensitive to any shift in investor sentiment.
Goldman previously cautioned earlier this month that global equities face near-term correction risks, citing a combination of geopolitical tensions, elevated valuations, and structural disruption tied to artificial intelligence. These factors, combined with rising oil prices and uncertainty surrounding global growth, have created a more fragile market environment.
Long-term outlook remains positive
Despite highlighting downside risks, Goldman Sachs maintained its year-end forecast for the S&P 500 at 7,600, suggesting that the bank still expects equities to recover if geopolitical tensions ease and economic momentum remains intact.
Such a rebound would likely depend on several factors, including stabilization in oil markets, continued corporate earnings growth, and sustained investment in artificial intelligence technologies.
For now, however, the escalating conflict involving Iran has introduced a new layer of uncertainty into global markets. If energy supply disruptions deepen and oil prices remain elevated, the resulting inflation shock could force central banks to keep interest rates higher for longer—an outcome that would challenge equity markets that have been buoyed for years by relatively loose monetary policy.