S&P 500: Goldman Sachs says this is the key issue for the second quarter

Investing.com - As the market prepares for the first quarter earnings season of 2026, the U.S. stock market is grappling with a complex situation of compressed valuation multiples and resilient corporate fundamentals.

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According to Goldman Sachs Group (NYSE:GS) latest “Weekly Kickoff” report, the S&P 500 index has dropped 9% from its January peak, primarily driven by soaring oil prices, rising interest rates, and the ongoing instability of the Iran war.

Although analysts have unusually raised their earnings per share (EPS) forecasts for 2026 by 3%, the price-to-earnings (P/E) ratio for the benchmark index has plummeted from 21 times to 19 times over the past month.

Technical Sentiment and Fundamental Resilience

From a technical perspective, the sharp decline in market positioning suggests that investor sentiment may be resetting. Goldman Sachs’ U.S. equity sentiment indicator has fallen to -0.9, the lowest reading since August 2025. Historically, readings below -1 often predict above-average returns.

However, analysts warn that if the fundamental outlook does not improve significantly, the current positioning levels may not be sufficient to trigger a rebound. The market pricing for economic growth indicates that if conflicts in the Middle East continue to escalate, the stock market could face further downward pressure.

Despite facing macro headwinds, the fundamental benchmarks of U.S. companies remain solid. Goldman Sachs maintains its baseline forecast for a 12% EPS growth for the S&P 500 index in 2026, provided that the current chaotic situation does not extend severely.

The upcoming earnings season will serve as a critical litmus test for the firm’s optimistic expectations, as investors seek evidence that companies can maintain profit margins in an environment of high energy costs and shifts in global trade routes.

Policy Impact and Market Path

The market is currently focused on the Federal Reserve’s response to the stagflation pressures brought about by the Iran war. Corporate earnings are growing, but the combination of high oil prices and stubborn inflation complicates the potential path for interest rate cuts.

Investors are increasingly favoring companies with high-quality factor scores and strong balance sheets, which can withstand a “higher for longer” interest rate environment.

As first-quarter reports begin to surface, the ability of management teams to provide credible guidance amid regional turmoil will determine whether the S&P 500 index can find a bottom at current levels.

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