Goldman Sachs strategists have warned that global equity markets face rising correction risks as soaring oil prices worsen the growth and inflation outlook, while valuations across most regions sit at or near historical highs.
In a note published on Monday, the bank's equity strategy team led by Peter Oppenheimer argued that markets are more vulnerable to the current energy shock than they were heading into the Russia-Ukraine war in 2022, with valuations across every major region except China now above long-run averages.
The US market trades at a forward price-to-earnings multiple of 21.1 times, the UK at 14.1 times and Europe at 18.3 times, all at elevated percentiles of their historical ranges.
Goldman's commodity analysts have increased their assumed duration of reduced flows through the Strait of Hormuz to 21 days from 10, with Brent now seen averaging $98 in March and April before falling back to $71 by the fourth quarter of 2026.
Even the central case slows US GDP growth by 0.3 percentage points to 2.2%, and the bank's economists have raised their US recession probability to 25% from 20%. Goldman has also pushed back its forecast for the first Federal Reserve rate cut to September from June, with a second expected in December.
The note identifies several compounding vulnerabilities. Equity risk premia have fallen to pre-financial crisis levels, leaving little cushion against rising bond yields.
Cyclical stocks now trade at roughly the same valuation as defensives, a rare occurrence outside of cycle lows. Investors remain long risk and short protection, with Goldman's Risk Appetite Indicator sitting close to neutral rather than the deeply negative readings that have historically signalled capitulation and buying opportunities.
The bank's asset allocation team has downgraded equities to neutral and raised cash to overweight over a three-month horizon, though it retains an overweight stance over 12 months.
Despite the risks, Goldman stopped short of forecasting a bear market, citing resilient earnings, strong corporate balance sheets, elevated household savings and the historically short-lived nature of geopolitical shocks on equity markets.