Goldman Analysts Warn of Equity Risk Amid Record Valuations

Goldman Sachs equity strategists have issued a cautionary note on global equities, highlighting that current valuation levels are unsustainable without significant earnings growth. The firm’s analysis shows the S&P 500’s forward P/E ratio has reached 22.4, the highest level since 2021 and well above its long-term average of 17.8. This reflects investor optimism that may be detached from underlying corporate profitability trends. The warning is particularly acute for large-cap U.S. stocks, where 68% of companies in the index now trade at premiums exceeding historical norms. Even after recent pullbacks, the Russell 2000 small-cap index remains 14% above its five-year average P/E multiple, raising concerns about sector-specific overvaluation. Analysts point to slowing earnings momentum in Q4 2025, with projected EPS growth for the S&P 500 dipping to just 3.2% year-over-year—a sharp decline from 8.9% in early 2024. Market volatility has also increased, with the CBOE Volatility Index (VIX) averaging 16.7 in December 2025, up from 12.3 in Q1 of that year. This uptick suggests rising uncertainty among investors, especially amid tighter monetary policy and geopolitical headwinds. Goldman advises clients to reassess exposure to high-momentum sectors like tech and communications services, which currently represent nearly 30% of the S&P 500’s total market cap. The implications extend beyond asset allocation: corporate balance sheets face heightened pressure if discount rates rise further or credit spreads widen. Institutional investors, including pension funds and endowments, could see erosion in portfolio returns if equity markets correct sharply. A 10–15% downside scenario is now considered plausible by some analysts within the firm.