U.S. equity markets are confronting a combination of compressed valuation multiples and comparatively robust corporate fundamentals as investors prepare for the first-quarter earnings season of 2026. According to Goldman Sachs' latest "Weekly Kickstart" note, the S&P 500 has retraced roughly 9% from its January highs, a move the bank attributes primarily to surging oil prices, tighter interest-rate expectations and ongoing instability tied to the Iran war.
That sell-off has coincided with a meaningful contraction in headline valuation. Goldman reports the benchmark index's price-to-earnings multiple has moved down from 21x to 19x over the past month. At the same time, analysts have slightly lifted forward earnings assumptions for the year: 2026 EPS forecasts are up by 3%.
Technical positioning and fundamental resilience
From a technical standpoint, the adjustment in market positioning has been sharp, suggesting a potential reset in investor sentiment. Goldman Sachs' U.S. Equity Sentiment Indicator has slipped to -0.9, its weakest reading since August 2025. The bank notes that historical readings below -1 have tended to precede above-average returns, although that relationship is descriptive rather than prescriptive.
Even with the softer positioning, Goldman analysts caution that an uplift in sentiment alone may not be enough to trigger a sustained rally. For a recovery to take hold, the underlying fundamental outlook needs to show clearer signs of improvement. The bank highlights the risk that market pricing of economic growth could worsen if the regional conflict in the Middle East intensifies further, which would add downside pressure on equities.
On the fundamentals side, Goldman Sachs describes the baseline for U.S. corporations as intact despite macro headwinds. The bank's base-case scenario projects 12% EPS growth for the S&P 500 in 2026, conditional on the assumption that current disruptions - including elevated energy costs and trade-route frictions - do not become severely prolonged.
The upcoming first-quarter reporting season is framed as a pivotal test. Investors and analysts will be watching whether companies can sustain margins and deliver credible guidance in an operating environment defined by high energy costs and shifting global trade patterns. Management commentary on margin pressures and forward-looking guidance will be central to Gauging whether the current valuation adjustment is sufficient or whether additional downside remains.
Policy context and investor positioning
Market participants are also focused on how the Federal Reserve will respond to what Goldman describes as stagflationary pressures arising from the Iran war. Corporate earnings growth is present, but the combination of elevated oil prices and persistent inflation has complicated the timeline and scope for potential rate cuts.
Consequently, investors increasingly prefer companies with high quality factor scores and strong balance sheets that are better positioned to endure a "higher-for-longer" interest-rate environment. As first-quarter reports are released, the ability of management teams to provide reliable guidance amid regional volatility will be a key determinant of whether the S&P 500 can find a floor at current levels.
Note on scope - This article summarizes the key points from Goldman Sachs' recent market note and outlines the questions investors will be watching as Q1 2026 results arrive.