The S&P 500 closed the previous session about 5% below its record high. With no end in sight for the U.S.-Israel war against Iran, there’s an increasing danger the pullback for equities could get worse.

That’s the message from many analysts, including a team of strategists at Goldman Sachs led by Ben Snider. In a note published late Friday, the Goldman team acknowledge growing risks that higher-for-longer oil prices could damage the economy significantly and hit a stock market whose relatively rich valuations leave it vulnerable.

In what it calls a moderate-growth shock scenario, they see a decline in the S&P 500 to 6,300 — which they say is equivalent to a one-standard-deviation decline in its sentiment indicator and a price-to-earnings multiple of 19.

But Goldman goes further, warning: “An equity market decline matching the most severe oil supply shocks in recent decades would reduce the S&P 500 level by 19% from current levels to 5400, bringing the P/E multiple to 16x.”

A decline to 5,400 would represent a 23% decline from the S&P 500’s most recent peak, more than meeting the conventional bear-market definition of a 20% fall.

Source: Goldman Sachs.

For now the Goldman team is maintaining its S&P 500 year-end target of 7,600, as the team thinks mildly softer economic growth and a possible reduction in Federal Reserve interest-rate cuts are counteracted by continued AI spending, in particular.

But given its more cautious outlook Goldman is revising its U.S. equity recommendations. Higher oil prices will cut short the previously expected economic acceleration, and so Goldman now favors stocks with secular rather than cyclical growth profiles. “We maintain our overweights in health care and materials but no longer recommend stocks exposed to the middle-income consumer or the non-residential construction cycle,” they say.

Yes, a resolution of the Iran war might cause a jump in cyclical stocks, but this is not Goldman’s base case. That said, because the market has already started to price in a more pessimistic economic outlook, Goldman also doesn’t think investors should rotate completely toward defensive stocks.

Goldman says it would not chase the recent rebound in the software sector, except for cybersecurity plays, which represent relatively good value as the Iran war provides a reminder of an increasing need for IT safety.

“An increased focus on cybersecurity risks should underscore the value of these companies’ domain experience and sophisticated application of AI, especially relative to the broad universe of software companies facing fears of disruption risk,” says Goldman.

The top five cybersecurity stocks by market capitalization that Goldman highlights are Palo Alto Networks, CrowdStrike, Fortinet, Zscaler and Check Point Software.

A sector expected to benefit from secular growth via the AI boom and higher oil prices is green energy, Goldman reckons. “The project pipeline for solar appears robust, and consensus sales growth expectations have been improving for the group since mid-2024, with the median US solar energy company now expected to grow sales by 10% in 2026 vs. 6% for the S&P 500.”

Source: Goldman Sachs

Goldman’s preference for higher-quality, less-cyclical stocks means it favors large caps over small caps. But among small and medium caps it prefers the profitable and relatively inexpensive S&P Mid-Cap 400 and S&P Small-Cap 600 over the Russell 2000.