Goldman Sachs strategists say the market reaction to the recent escalation in the Middle East echoes patterns observed in earlier geopolitical shocks. The S&P 500 has retreated by roughly 2% since last Friday following the escalation, and volatility increased over the course of the week.
Examining seven comparable episodes since 1950, Goldman found that "the S&P 500 declined by an average of 4% in the first week but recovered within the subsequent month." That historical template, the strategists argue, suggests the current short-term drawdown is consistent with prior episodes of geopolitical risk.
Still, Goldman cautions that the ultimate path for equities will depend on developments in energy markets and on economic growth. The strategists note that modest increases in oil prices are likely to have limited direct consequences for U.S. growth and inflation. Specifically, they estimate that a sustained $10-per-barrel rise in oil would trim 2026 U.S. GDP growth by about 10 basis points and lift core consumer price inflation by fewer than 5 basis points.
The firm also highlights offsetting sectoral effects of higher oil. Energy producers tend to see improved earnings when crude rises, while consumer-facing businesses and industries that use oil as an input often face margin pressure. On balance, Goldman expects the net effect on S&P 500 earnings to be "roughly neutral," although outcomes will differ materially across sectors.
Goldman identifies a scenario with greater downside: a prolonged disruption to oil supply that weighs on economic activity. The strategists quantify the sensitivity of corporate earnings to growth, estimating that "every 1 pp change in real U.S. GDP growth corresponds to a 3-4% change in S&P 500 EPS." A sustained increase in uncertainty could also erode equity valuations, dampen corporate confidence, and undermine the nascent rebound in industrial activity that has supported rallies in many old economy cyclicals.
Beyond the energy channel, Goldman points to the trajectory of investment in artificial intelligence as a central driver of earnings growth. The firm estimates that AI investments and AI cloud services accounted for roughly 25% of S&P 500 EPS growth in 2025 and could contribute about 40% of that growth in 2026. While AI is expected to raise overall S&P 500 earnings over time through productivity gains, Goldman notes there is little evidence so far of a large productivity impact.
In sum, Goldman frames the current market move as a historically familiar short-term reaction to geopolitical risk, with the balance of outcomes dependent on whether oil price moves remain modest or escalate into a sustained supply shock, and on how investment themes such as AI evolve to support earnings in the months ahead.
Context for markets and sectors
- Energy: Higher oil prices can boost energy sector earnings but pose a headwind to oil-using industries and consumer-facing firms.
- Industrials and cyclicals: A rebound in industrial activity has underpinned recent gains in many old economy cyclicals; renewed uncertainty could reverse that trend.
- Technology and AI-related firms: Continued investment in AI and cloud services is an important contributor to earnings growth, according to Goldman.