Goldman Sachs warns of further equity correction but rules out bear market

• US equities trade at 21.1x forward P/E, UK at 14.1x, and Europe at 18.3x, all above historical averages except China, while equity risk premia have fallen to pre-financial crisis levels
• Goldman raised its US recession probability to 25% from 20%, expects GDP growth to slow by 0.3 percentage points to 2.2%, and pushed back the first Fed rate cut forecast from June to September
• The bank's commodity analysts extended the assumed duration of reduced Strait of Hormuz flows to 21 days from 10, with Brent crude expected to average $98 in March-April before falling to $71 by Q4 2026

Summary

Goldman Sachs has warned of increased correction risks in global equity markets due to surging oil prices and elevated valuations, though it stops short of predicting a bear market.

Key Figures and Valuations

Current forward price-to-earnings multiples show stretched valuations: US markets at 21.1x, UK at 14.1x, and Europe at 18.3x—all at or above historical averages. Only China trades below long-term norms. Equity risk premia have fallen to pre-financial crisis levels, leaving minimal buffer against rising bond yields.

Oil Price Impact

Goldman's commodity analysts extended their assumed disruption at the Strait of Hormuz to 21 days from 10 days. Brent crude is forecast to average $98 in March-April before declining to $71 by Q4 2026. This energy shock is expected to reduce US GDP growth by 0.3 percentage points to 2.2%, with recession probability rising to 25% from 20%.

Federal Reserve Outlook

The bank has delayed its forecast for the first Fed rate cut to September from June, with a second cut expected in December.

Strategic Positioning

Goldman's asset allocation team downgraded equities to neutral and raised cash to overweight over a three-month horizon, while maintaining an overweight stance over 12 months. The firm's Risk Appetite Indicator sits near neutral rather than showing capitulation signals.

Bear Market Ruled Out

Despite correction risks, Goldman cited resilient earnings, strong corporate balance sheets, elevated household savings, and the historically temporary nature of geopolitical shocks as reasons why a full bear market remains unlikely.