A recent revision from Goldman Sachs Research trims expectations for the U.S. equity market, reflecting a poorer growth backdrop, higher tariffs, and a broader sense of uncertainty. The S&P 500 is now forecast to finish the year around 6,200, down from a prior projection of 6,500. That adjustment translates to roughly a 7% gain from current levels by year-end, based on the outlook available as of March 25. Along with the price target, the team reduced its earnings-per-share growth forecast for the S&P 500 to 7% from 9%, and it now estimates the average constituent of the index will earn about $262 per share in the current fiscal year, versus $268 in the previous forecast. The note emphasizes that headwinds arising from a spike in uncertainty tend to be relatively short-lived, according to Goldman Sachs Research Chief US Equity Strategist David Kostin, while a slower growth trajectory implies valuations that are lower on a more sustained basis.
Economic and Market Outlook
In digesting the revised outlook, the team at Goldman Sachs Research underscores that the path for equities hinges on the interaction between economic activity, corporate earnings, and the policy environment. The downgrade to the S&P 500’s year-end target suggests that investors should recalibrate expectations for earnings and valuations in light of a slower growth regime and the persistence of uncertainty that accompanies tariff policy and geopolitical considerations. While near-term volatility may persist as markets reassess macro data and policy signals, the analysts stress that the volatility itself does not dictate a permanent decline in market prospects, provided that growth resumes and earnings momentum is restored.
The revised earnings trajectory, which sees average S&P 500 earnings per share rising by 7% rather than 9%, indicates that corporate profitability is expected to advance at a more moderate pace. The implied deterioration in the profitability trajectory is linked to higher input costs or margins under pressure from tariff-related pass-through to consumers, or from a softer demand environment that constrains pricing power and top-line expansion. Goldman Sachs Research notes that even with a slower growth backdrop, the market’s valuation framework remains sensitive to the balance between earnings growth, interest rates, and risk premia, all of which interact to shape the price path for the S&P 500. The forecast assumes that the macro backdrop remains uncertain, and that investors will require additional clarity on tariff policy and broader economic momentum before revisiting higher valuation multiples.
The discussion also highlights a critical nuance: while a brief spike in uncertainty can depress valuations in the short run, the more meaningful question for long-run investors is the trajectory of fundamental growth and how it feeds through to corporate earnings. The team suggests that improved clarity on policy and stronger growth data could lift valuations from their subdued levels, whereas a pronounced and sustained deceleration in economic activity would exert persistent downward pressure on valuations even if financial conditions stabilize. In short, the emphasis is on the distinction between temporary volatility driven by policy noise and the more persistent re-pricing that accompanies a slower growth regime.
Within this framework, Kostin emphasizes that investors, particularly portfolio managers, are actively weighing the potential implications of a recession for U.S. equities. The discussion draws on a historical lens to calibrate what a recession could imply for the market’s price dynamics and for earnings profiles. The assessment points toward a nuanced picture: while drawdowns during economic contractions are typically sharp, they also have a history of creating valuable entry points for investors who maintain a disciplined approach to valuations and earnings resilience. The emphasis is on patience and data-driven adjustments rather than reactive positioning to headlines.
Earnings Sensitivity and Valuation Dynamics
A central thread in the updated assessment revolves around how external shocks—especially tariff-related policy changes—interact with earnings. The team provides a framework for thinking about earnings sensitivity: for every incremental five-percentage-point uptick in the tariff rate, S&P 500 earnings per share are expected to be reduced by roughly 1–2%, assuming that companies can pass a portion of tariff costs to consumers. This rule of thumb captures the sensitivity of corporate margins to tariffs, a factor that is contingent on the ability of firms to maintain pricing power, the degree of pass-through, and the elasticity of demand for the products and services in question. The forecast also acknowledges that early signals of weaker-than-expected domestic demand or slower activity can feed into the earnings outlook, as slower growth tends to translate into slower earnings expansion. In practice, this means that the trajectory of real GDP growth and the policy stance toward trade can exert a meaningful influence on the earnings outlook for the broad market.
The revision to the real U.S. GDP growth forecast, with the 2025 calendar year projection adjusted to 1.7% year-over-year from a prior estimate of 2.2%, further anchors the discussion in a more modest growth scenario. The implication is that even if the economy remains in positive territory, the pace of expansion is not robust, which tends to weigh on corporate earnings growth and, by extension, on market valuations. This revision aligns with the broader narrative that uncertainty — whether from tariffs, trade frictions, or other policy risks — acts as a headwind that can dampen upside potential for equities in the near to intermediate term. The market’s pricing dynamics, in this view, reflect a more cautious stance as investors weigh the probability and potential severity of slower growth against the possibility of policy normalization or escalation.
Recession Risks and Historical Context
From Goldman Sachs Research’s perspective, the pressure points in the market are shaped not only by current data but also by the historical behavior of equities during economic downturns. Kostin notes that over 12 major economic downturns since World War II, the S&P 500 typically declined by about 24% from its peak, while earnings fell by roughly 13% on a median peak-to-trough basis. This historical frame provides a reference for the typical severity of equity market corrections during recessions and highlights the asymmetric nature of the risk to capital during economic contractions. The historical pattern serves as a benchmark for evaluating present conditions, offering a lens through which to assess the plausibility of downside scenarios and the potential for subsequent recovery as earnings stabilize and policy responses take effect.
The research also observes that short-term peak-to-trough declines, or drawdowns, are generally viewed by many market participants as opportunities to accumulate equities, particularly when the economy and earnings trajectory show signs of resilience or improvement. In the last four decades, the S&P 500 has exhibited a median annual drawdown of around 10%, a figure that aligns with this year’s earlier decline and provides a reference point for investors evaluating the potential for a rebound. The interpretation is that, within a longer-term investment horizon, occasional drawdowns can be a part of a healthy rebalancing process that yields attractive risk-adjusted returns when accompanied by ongoing earnings growth or an improving macro backdrop. The historical context thus informs a more nuanced approach to risk management, emphasizing the importance of maintaining a disciplined framework for assessing the balance between risk and reward in a turbulent environment.
The team also cites the probabilistic lens through which recession risk is assessed. The estimated probability of a recession in the coming 12 months stands at about 20%, modestly above the unconditional historical average of 15%. By comparison, the consensus among economists, which aggregates a broader set of forecasts, sits at roughly a 25% likelihood. This framing underscores that while the risk of recession remains elevated relative to some baseline measures, it is not an outsized or existential threat relative to historical cycles. The distinction between the probability of recession and the severity of its impact matters for portfolio construction and risk management, as investors may hedge or diversify to withstand potential deterioration in the economic narrative. The overarching point is that the market risk environment is characterized by a delicate balance: a nontrivial probability of economic weakness exists, but there are also structural reasons to expect that drawdowns could be followed by a period of stabilization or recovery if the economy adapts and earnings expectations adjust accordingly.
Probability of Recession and Market Risk
The discussion around recession risk also addresses how investors interpret and price in the possibility of a downturn. Kostin highlights that the primary market risk going forward is the potential for a major further deterioration in the economic outlook. In practical terms, this means that the health of the macro environment remains a critical driver of equity valuations and investor sentiment. If economic indicators worsen materially, or if tariff policy becomes more restrictive or unpredictable, the market could reprice risk more aggressively than in a scenario where the pace of growth remains manageable and policy clarity improves. Conversely, even with the presence of uncertainty, catalysts such as better growth data, more stable policy directions, or a more favorable earnings trajectory could buoy markets by improving valuation multiples or by offsetting some of the headwinds from growth weakness.
As investors weigh the likelihood and implications of a recession, the historical context provides a framework for interpreting current data. The juxtaposition of a 20% recession probability against a 25% consensus estimate suggests a spectrum of views about the near-term risk, with many market participants placing more emphasis on the potential for policy normalization and earnings resilience. This creates an environment in which tactical decisions—balancing risk with potential upside—become central to portfolio management. At the same time, the risk of a sharper downturn remains a material concern, reinforcing the notion that risk controls and diversification remain integral to investment strategies during periods of elevated uncertainty.
Drivers of the Sell-off and Policy Uncertainty
The recent market decline is attributed to a confluence of factors that collectively increased policy uncertainty and raised concerns about the growth outlook. First, policymakers’ attitudes toward tariffs and trade policy emerged as a primary driver of the disruptive dynamics in equity markets. Heightened tariff-related concerns feed into expectations for cost pressures on businesses, pricing decisions for consumers, and the broader macroeconomic environment. The team notes that policy uncertainty, particularly around tariffs, has been a leading source of volatility and is expected to continue shaping investor sentiment as policymakers navigate domestic and international considerations.
Second, the market’s downward tilt reflects a broader deterioration in growth prospects. Investors considered the outlook for U.S. economic activity and corporate earnings to have shifted toward a softer trajectory, with implications for equity valuations and the sustainability of earnings growth. When growth decelerates, profits tend to grow at a slower pace, which in turn dampens the rationale for higher valuations, especially in environments where investors seek a higher premium for risk or where discount rates rise in response to perceived policy or macro risk.
Third, the unwinding of positions by investors—particularly hedge funds—played a notable role in amplifying the decline. Goldman Sachs Research’s analysis indicates that the basket of most-popular stocks among hedge funds suffered its sharpest period of underperformance relative to the S&P 500 in five years. The unwind affected assets that were highly owned or concentrated within hedge fund portfolios, contributing to broader selling pressure and a shift in market leadership. The magnitude of this unwind is evidenced by the fact that more than half of the S&P 500’s roughly 10% drop from its February peak can be traced to the selloff in a few of the largest U.S. technology-driven names known as the Magnificent Seven, illustrating how concentration in a few high-profile stocks can significantly influence overall index performance during periods of risk-off sentiment.
In combination, these drivers illustrate a market environment characterized by elevated sensitivity to policy signals, a more cautious growth outlook, and structural shifts in investor positioning. The interplay among tariffs, macro momentum, and positioning dynamics has created a landscape where sentiment can shift rapidly in response to new data, policy announcements, or evolving expectations about the speed and direction of economic activity. The practical implication for investors is to consider how these factors affect both risk and return, particularly in the context of a market where sector leadership can be volatile and where macro uncertainty can disproportionately affect pricing for cyclical and economically sensitive stocks.
Tariffs and Earnings Dynamics
A key component of the discussion centers on tariff policy and its direct implications for earnings. Goldman Sachs Research recently revised its forecast for the average US tariff rate, projecting an increase of about 10 percentage points to around 13%. This projection has meaningful implications for firms’ earnings power, especially those with exposure to import costs and consumer pricing pressures. The research team highlights that, as a rule of thumb, every incremental 5 percentage-point rise in the US tariff rate tends to reduce S&P 500 earnings per share by approximately 1–2%, assuming that companies are able to pass through a portion of the tariff costs to consumers. This relationship is a useful heuristic for analyzing sectoral and company-level impacts, particularly for industries characterized by high import exposure or where competitive dynamics allow for pricing strategies that can offset some of the tariff-related cost pressures.
The tariff dynamics interact with the broader growth outlook in ways that can amplify or mitigate market responses. If tariff costs are passed through to consumers, the direct earnings impact may be partly offset by heightened revenue, but it can also soften demand if prices rise and consumer purchasing power is constrained. On the other hand, if pass-through is limited or consumer demand weakens, margins may compress more than anticipated, further depressing earnings growth and valuation multiples. The sensitivity of earnings to tariff policy adds another layer of complexity to forecasting, underscoring the need for careful assessment of exposure by sector, geography, and supply chain structure. The forecast thus embodies an integrated view of policy risk, macro momentum, and potential corporate resilience, recognizing that tariff policy remains a central uncertainty that can shape both revenue growth and margin dynamics.
Growth Outlook and Economic Indicators
Beyond tariffs, the outlook for real U.S. economic activity remains a focal point. Goldman Sachs Research has adjusted its real GDP growth forecast downward for the near term and the longer view, signaling a more cautious stance toward macro momentum. The revision to 1.7% year-on-year real GDP growth by the end of the 2025 financial year marks a meaningful deceleration from the prior 2.2% estimate. This adjustment reflects a combination of softer domestic demand, potential headwinds from trade policy, and the broader uncertainty enveloping the economic landscape. Such a growth path has direct implications for earnings growth, as corporate profitability tends to track the pace of economic expansion and the strength of demand across sectors.
The lower growth projection is consistent with a broader narrative in which macro volatility and policy-driven uncertainty influence investment decisions. Weaker indicators of activity historically translate into more cautious forecasts for corporate earnings growth, and subsequently, to the valuation discipline that investors apply to the market. In practice, this means markets may price in a more tempered earnings horizon and require additional catalysts—such as improved growth data, greater tariff policy certainty, or improved macro data—to justify higher multiples or to sustain a longer-term uptrend. The forecast acknowledges that the interplay between growth dynamics and policy outcomes is critical to determining the trajectory of equities, and it places a premium on clear policy direction and improving domestic demand signals as potential pathways to renewed market strength.
Weaker-than-expected activity indicators—such as manufacturing or services data, consumer spending patterns, or investment trends—serve as early signals that the macro outlook could deteriorate further. The link between a softer economy and slower earnings growth reinforces Goldman Sachs Research’s cautious stance, as the market tends to reprice equities in response to evolving expectations about growth and profitability. This complexity also implies that market participants should monitor a broad set of data, including real GDP growth, inflation pressures, productivity metrics, and trade developments, to gauge the resilience of the earnings framework and the potential for a sustained rebound in the S&P 500.
Market Positioning, Hedge Funds, and Sector Impact
An important dimension of the current market environment is the unwinding of market positions, particularly within hedge fund portfolios. Goldman Sachs Research notes that the stock basket most popular among hedge funds has experienced the sharpest relative underperformance versus the S&P 500 in five years. This underperformance signals a notable shift in dispersion across stock leadership, as funds reallocate away from previously crowded trades toward positions that may offer greater hedging or more stable earnings profiles. The dynamics of positioning contribute to amplified market moves, especially when crowded trades unwind in a market that is already grappling with a slower growth impulse and policy-related uncertainty.
In terms of sectoral and stock-level implications, the decline from the February all-time high has been disproportionately influenced by a narrow group of leading technology names. Specifically, more than half of the roughly 10% drop in the S&P 500 from its peak has been attributed to a sell-off in the Magnificent Seven—the cluster of large U.S. tech giants that had dominated leadership during the prior upcycle. The concentration of performance among a handful of high-valuation technology firms creates a transfer of risk when investor sentiment shifts or when concerns about growth, margins, or competitive dynamics intensify. For stock pickers and portfolio managers, these dynamics underscore the importance of understanding how hedge fund positioning interacts with macro uncertainties and the potential spillovers into broader market behavior.
The Market’s structural risk also includes the potential for leadership rotation, as investors rebalance toward more defensive or cyclically resilient exposures when confidence in the growth outlook declines. In such an environment, absolute performance becomes sensitive to stock-level risk factors, including earnings visibility, balance sheet health, leverage exposure, and sensitivity to global macro trends. The evolving risk landscape reinforces the value of a strategic framework that integrates macro considerations with company-specific fundamentals, enabling investors to identify stocks that can withstand a higher degree of policy and growth uncertainty.
Stock Selection Strategy in an Uncertain Environment
Against this backdrop, Kostin’s team outlines a tactical approach to portfolio construction that emphasizes resilience to the major themes driving fluctuations in the markets. The emphasis is on favoring “insensitive” stocks—those that exhibit relatively lower sensitivity to shifts in U.S. economic growth, trade risk, and the impact of artificial intelligence and technology cycles. Investors are encouraged to screen for stocks with the lowest recent sensitivity to macro growth signals and to consider the subset of equities that have demonstrated resilience to valuation swings in the face of policy uncertainty.
Additionally, the analysts highlight opportunities among stocks that have been disproportionately harmed by hedge fund positioning unwind yet now trade at discounted valuations. Specifically, they point to equities that have fallen more than 15% from their highs and are trading at or below their three-year median price-to-earnings multiples. The logic is that these stocks may offer a combination of defensive characteristics, reasonable valuation floors, and earnings resilience that could support a recoveries in scenarios where macro and policy signals stabilize or improve.
The proposed screening approach is pragmatic yet nuanced: it seeks to balance defensiveness with value by targeting firms that can sustain earnings through slower growth, that benefit from relatively predictable demand in their segments, and that maintain resilience to tariff-induced cost pressures. The emphasis on valuation discipline also recognizes that the current environment may price in higher risk premia, particularly for cyclicals or high-beta names that are sensitive to growth and policy changes. The strategic takeaway is that a well-constructed portfolio can navigate uncertainty by combining defensible earnings streams with mispriced opportunities that have the potential to re-rate on improving macro signals or company-specific catalysts.
Practical steps for implementation
- Identify sectors and companies with low macro sensitivity, including staples, utilities, and certain healthcare franchises that tend to exhibit steadier demand.
- Screen for stocks that demonstrate robust free cash flow generation and conservative leverage, which can help weather earnings volatility and tariff costs.
- Look for valuations that are at or below three-year medians and show a margin of safety relative to peak prices observed in prior cycles.
- Monitor hedge fund flow data and positioning for potential contrarian opportunities where sentiment has become overly negative relative to fundamentals.
- Maintain a diversified mix that balances defensive plays with select cyclical exposures showing improving earnings catalysts or pricing power.
These steps reflect a disciplined approach to navigating an environment where policy uncertainty, tariffs, and slower growth present sustained challenges to earnings and valuations. The focus remains on identifying cash-generative businesses with durable earnings expectations, prudent balance sheets, and the capacity to absorb higher costs or demand softness without compromising long-term profitability. Such an approach aims to provide resilience while preserving upside potential in a market that may experience episodic volatility as policy and growth data evolve.
Recovery Paths and What It Would Take
Looking ahead, Kostin’s team suggests that a market recovery underpinned by a more favorable trajectory would likely hinge on one of three developments. First, an outright improvement in the outlook for U.S. economic activity could arise from stronger growth data, better-than-expected momentum across key sectors, or greater clarity and predictability around tariff policy. When growth signals strengthen and policy tends toward greater certainty, equity valuations can reprice higher as earnings expectations stabilize or accelerate.
Second, a valuation-driven recovery could emerge if equities begin to price economic growth at levels meaningfully below Goldman Sachs Research’s baseline forecast. In practice, this would imply that the market has already discounted a slower-growth regime to a degree that future earnings surprises are more likely to be on the upside rather than the downside. If valuations become more attractive relative to a given growth trajectory, investors may reenter the market with renewed confidence, particularly those seeking a more favorable risk-reward balance in sectors with robust cash flows and defensible margins.
Third, a recovery could be driven by a reduction in investor positioning risk. If shareholders’ exposure to hedged bets, crowded trades, or excessively risk-on bets eases to depressed levels, the market might experience a more stable and constructive re-rating. This would be accompanied by more confident positioning that aligns with a healthier macro backdrop and clearer policy signals, thereby supporting a more durable rally rather than a transient bounce.
The path to a sustained market recovery remains contingent on how the macro and policy environment evolves. The complexity of the current macro framework—characterized by tariff dynamics, growth uncertainty, and evolving investor positioning—implies that a successful rebound would likely require a combination of stronger growth data, improved tariff clarity, and risk premia compressing in a manner that reflects a lower perceived trajectory of downside risk. In this sense, the market’s resilience hinges on both the tangible momentum of the real economy and the qualitative signals from policy and sentiment that collectively shape investors’ willingness to commit capital at valuations that reflect a healthier earnings outlook.
Disclaimers and Educational Context
This analysis is provided for educational purposes and reflects a synthesis of market commentary and forecasting considerations. It does not constitute a formal recommendation from any Goldman Sachs entity to the recipient. The article does not offer financial, economic, legal, investment, accounting, or tax advice. While every effort is made to present accurate information, there is no warranty or guarantee as to the completeness or precision of the statements, and there is no liability for any direct, indirect, or consequential loss or damage arising from the use of the information provided. Readers are encouraged to perform their own due diligence and consult with a qualified financial professional before making investment decisions in light of these insights.
Conclusion
Goldman Sachs Research has issued a tempered but nuanced forecast for the U.S. stock market, reflecting a confluence of slower growth, higher tariffs, and increased policy uncertainty. The revised S&P 500 target of 6,200 by year-end signals a softer outlook relative to prior expectations, with earnings-per-share growth trimmed to 7% and average earnings projected at about $262 per share for the index. The analysis emphasizes that headwinds from uncertainty tend to be short-lived, but a slower growth trajectory implies a more persistent re-pricing of valuations. Looking back at history, episodes of drawdowns during economic contractions have often presented selective buying opportunities, especially when earnings and the economy show signs of resilience. The probability of a near-term recession sits around 20%, modestly above the long-run average but below some consensus expectations, while the risk of a meaningful deterioration in the economic outlook remains a central concern for market participants. Tariff policy, the pace of domestic growth, and investor positioning are identified as the principal levers shaping future performance. To position for potential recovery, strategists advocate focusing on comparatively insulated, reasonably valued stocks with durable earnings streams, while also remaining attentive to opportunities among undervalued equities that have been affected by hedge fund unwind dynamics. Ultimately, a combination of stronger growth signals, tariff clarity, and a prudent adjustment in investor positioning could set the stage for a more constructive market environment, even as the path remains weighted with uncertainty and the potential for continued volatility.
