Severe oil shock could drag S&P 500 down to 5,400, Goldman warns

Goldman Sachs said severe disruptions to oil supplies from the ongoing Middle East conflict could push the S&P 500 index .SPX down to nearly 5,400 this year, or about 19% below current levels.

The index last closed at 6,632.19 on Friday.

• In a scenario where there is a "moderate" U.S. economic growth shock, Goldman expects the index would fall to 6,300, nearly down 5% from current levels.

• The AI investment boom should offset the drag from modestly weaker economic activity, the brokerage added.

• Outside the Middle East conflict, Goldman expects the uncertainty surrounding the impact of AI to weigh on index valuations.

• Factoring in AI uncertainty, Goldman lowered its year-end S&P 500 forward price-to-earnings (PE) ratio to 21 from 22 earlier.

• Under scenarios where growth is "moderate" and oil supply shock "severe", PE ratio could drop to 19 and 16, respectively, the brokerage added.

• "The baseline outlook for U.S. equities remains constructive, but the war in Iran adds to the downside risk posed by elevated valuations," Goldman said.

• It retained its year-end forecast for the benchmark index at 7,600.

• Earlier this month, Goldman said it sees near-term "correction risks" for global stocks on geopolitical worries, AI disruption and elevated valuations.

-Reporting by Kanchana Chakravarty and Siddarth S in Bengaluru; Editing by Diti Pujara/Reuters