Oil Shock From Iran War Puts S&P 500 Earnings Growth at Risk, Goldman Sachs Warns

Wall Street’s biggest banks are sounding the alarm: if oil prices remain elevated following the widening U.S.-Israeli military campaign against Iran, the consequences for U.S. corporate earnings could be far more severe than markets are currently pricing in. Goldman Sachs, in a note published Friday, placed sustained oil disruption at the top of its risk list for S&P 500 earnings in 2026 — a warning that arrives as crude prices surge to levels unseen in nearly four years.

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Oil Hits $119 a Barrel — the Highest Since Mid-2022

Oil prices surged past $119 a barrel on Monday, marking the highest levels since mid-2022, as the U.S.-Israeli war with Iran continues to throttle supplies from one of the world’s most critical energy corridors. The disruption has slashed roughly 20% of global oil supplies that transit the Strait of Hormuz — the narrow waterway connecting the Persian Gulf to the wider world — causing Brent crude to rocket upward within days of the conflict’s opening salvos.

The conflict began on February 28, 2026, when joint U.S.-Israeli airstrikes targeted Iranian military and leadership infrastructure. Iran’s retaliation — including missile and drone strikes on Gulf-state partners hosting U.S. forces — quickly escalated into a broader regional confrontation. Iran has since announced that the Strait of Hormuz, through which about a fifth of the world’s oil passes, is closed to shipping, and vessels have largely avoided the waterway due to safety risks. The result: a commodity shock that is rippling outward into equity markets, inflation expectations, and central bank deliberations.

Goldman’s Warning: Prolonged Disruption Is the Real Danger

While Goldman Sachs acknowledges that modest increases in oil prices will have a relatively limited direct impact on S&P 500 earnings, the bank stresses that the real danger lies in a prolonged supply shock. In its Friday note, Goldman warned of “a more meaningful downside risk” to U.S. equities if severe oil disruption is sustained over a longer period.

The bank’s strategists, led by Ben Snider, quantified the exposure: every one percentage point drop in U.S. economic growth could reduce S&P 500 earnings by as much as 4%. Meanwhile, Goldman noted that a sustained $10-per-barrel rise in oil would reduce 2026 GDP growth by roughly 10 basis points while pushing core CPI higher by less than 5 basis points — an impact that, in isolation, appears manageable.

But it is the second-order effects that concern Goldman most. “A sustained increase in oil uncertainty would also threaten equity valuations, corporate confidence, and the nascent rebound in industrial activity,” the bank stated. The warning lands at a sensitive moment: after years of post-pandemic recovery and central bank tightening, many sectors of the U.S. economy had only recently begun to show signs of renewed momentum.

Geopolitical Shocks and the Historical Pattern

Goldman’s analysis places the current situation within a broader historical context. Looking at seven spikes in the geopolitical risk index since 1950, the bank found that the S&P 500 fell by an average of 4% in the first week of each episode — but typically recovered within the following month. The current episode has tracked this pattern closely: the S&P 500 is down more than 2% since the start of the conflict, with large intraday swings reflecting acute investor uncertainty.

Goldman CEO David Solomon, speaking at the Australian Financial Review Business Summit on Tuesday, acknowledged that markets have behaved with unexpected restraint. “I’m actually surprised,” Solomon said. “I think the market reaction has been more benign, given the magnitude of this, than you might think.” U.S. stocks remained volatile, with the Dow Jones Industrial Average falling 0.83%, the S&P 500 slipping 0.94%, and the Nasdaq Composite shedding 1.02% in that session.

The relative calm, however, may reflect a specific market bet: that the disruption will be short-lived. According to Goldman’s head of oil research, Daan Struyven, the oil price level of around $78 a barrel seen in the opening days of the conflict implied that traders were pricing in a disruption lasting roughly four weeks. Since then, prices have surged well past that level, signalling that confidence in a rapid resolution has faded.

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AI Investment: The Other Pillar of S&P 500 Earnings

Away from the oil shock, Goldman Sachs highlighted that AI investment remains the other critical variable for S&P 500 earnings in 2026. The bank projected that AI investments and AI cloud services accounted for roughly 25% of S&P 500 earnings-per-share (EPS) growth in 2025 and will account for approximately 40% of growth in 2026.

This concentration of earnings growth in a single theme introduces its own set of risks. If AI spending by hyperscalers slows — whether due to rising financing costs, geopolitical uncertainty, or regulatory pressure — the ripple effect on S&P 500 earnings could be significant. Goldman noted that AI will eventually lift broader earnings through enhanced productivity gains, but said it does not yet see evidence of a significant macro-level impact on corporate earnings from AI-driven efficiency.

The AI-versus-oil dynamic creates a bifurcated risk environment: while energy-intensive sectors face direct margin compression from higher crude prices, the technology sector’s fortunes hinge on the continuation of an unprecedented capex cycle that has already lasted several years. For now, Goldman sees both risks as manageable — but only under a scenario where the oil disruption does not persist.

Barclays: Fed Could Delay Rate Cuts if Oil Stays High

Adding a monetary policy dimension to the market debate, Barclays weighed in separately on the inflation implications of the oil surge. The bank noted that the U.S. Federal Reserve has historically looked past oil-price-induced inflation, keeping its focus on core inflation measures — which strip out volatile food and energy prices — when making rate decisions.

However, Barclays warned that this approach has limits. If oil prices remain elevated for an extended period, concerns about upside risks to inflation expectations could begin to emerge, potentially leading the Fed to delay further rate cuts. Under its baseline outlook, Barclays forecasts headline CPI at 2.7% year-over-year and core CPI at 2.8% by December 2026, assuming energy prices do not remain elevated for a prolonged period. But a sustained period of oil near $100 could push headline inflation closer to 3% by late 2026.

Barclays also estimates that a 10% sustained increase in crude oil prices could add roughly 0.2 percentage points to headline CPI within one to two months, mainly through higher gasoline prices. The pass-through to core inflation is expected to be smaller and slower.

The Fed’s Difficult Position

The Federal Reserve is caught between competing pressures. The FOMC voted in January to hold the federal funds rate at 3.50% to 3.75%, with two dissenters — Stephen Miran and Christopher Waller — preferring a 25 basis point cut. The decision to hold was made before oil prices reached current levels.

Now, the energy price surge is complicating the picture further. Traders who, as recently as last Friday, were fully pricing in two Fed rate cuts this year have trimmed the odds of a second cut to about 80%, according to Bloomberg data. The consensus view on the timing of the first cut has shifted from July to September.

Minneapolis Fed President Neel Kashkari said the conflict and its potential inflationary consequences made him less certain of his view that a rate cut was likely this year. Meanwhile, San Francisco Fed President Mary Daly said a softening labor market combined with inflation still running above the 2% target creates a difficult policymaking environment.

A separate analysis from the San Francisco Federal Reserve found that interest rates have become significantly more sensitive to oil supply shocks since the Fed’s 2022 rate liftoff. An oil supply surprise that raises prices by 3% now results in two-year Treasury yields rising by up to 4.5 basis points — more than three times the reaction seen in the pre-2021 period.

What Comes Next?

The critical question for investors is whether this disruption will remain contained or escalate further. Rystad Energy’s head of geopolitical analysis, Jorge Leon, noted in a weekend note that there had been an “effective halt of traffic” through the Strait of Hormuz, and that elevated oil prices are expected to persist until the strait becomes passable again.

Asian economies — particularly China and India, which are heavily dependent on Gulf oil — would be left particularly exposed to a prolonged closure. U.S. domestic energy production provides some insulation for American markets, but is unlikely to offset a complete halt in Hormuz traffic.

For the S&P 500, the path forward is narrow. If the conflict de-escalates within weeks, Goldman’s historical analysis suggests a rapid recovery is plausible. But if oil remains above $100 and supply disruptions persist into the second quarter, the combination of compressed margins, inflation risk, delayed rate cuts, and weakening consumer spending could translate into a meaningful downward revision of 2026 earnings estimates. Goldman’s 4% EPS hit per percentage point of lost GDP growth is a warning investors should take seriously — and a reminder that geopolitical risk, for all its tendency to produce short-lived market reactions, carries the potential for lasting economic damage when it intersects with commodity markets at this scale.

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By: Montel Kamau

Serrari Financial Analyst

10th March, 2026