Goldman Sachs is warning that the risk of a near-term equity market pullback has risen sharply, suggesting the S&P 500’s strong run could soon face turbulence.
In its latest note to clients, the firm said its proprietary equity asymmetry framework—a model that evaluates stocks against prevailing market conditions and recent economic data—is flashing a higher probability of downside. According to Goldman’s analysis, there is now:
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Over a 10% chance of a drawdown within the next three months.
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More than a 20% chance of a drawdown in the next 12 months.
These figures represent a meaningful jump and mirror conditions seen earlier this year, just before the April 2 announcement of tariffs by former President Donald Trump triggered a steep market sell-off. “The equity drawdown probability is elevated and has increased recently. Usually, levels above 30% indicate notable downside risk, and current readings are closing in on that threshold,” Goldman analysts wrote.
Why the Risk Has Risen
Goldman identified two main drivers behind its elevated risk signal:
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Low Volatility Masking Fragility
The VIX, Wall Street’s volatility benchmark, has dropped roughly 71% from its Liberation Day peak. Historically, extended periods of low volatility can breed complacency, leaving markets vulnerable to sharp reversals when unexpected shocks occur. -
Economic Momentum Losing Steam
In low-volatility markets, continued strength in economic fundamentals is usually required to sustain equity gains. Goldman believes that foundation is weakening, citing “worsening business cycle momentum” and softer labor market data. Recent payrolls have missed expectations, signaling possible cracks in the economic expansion.
Tariffs, Inflation, and the Fed
Goldman’s economists also warn that inflation could accelerate in the second half of the year as tariff effects work their way through the economy. David Mericle, the bank’s chief U.S. economist, told CNBC he expects inflation to drift above 3%, which could pressure both consumers and corporate margins.
Higher inflation may prompt the Federal Reserve to ease policy further, but Goldman cautions that even additional cuts might not calm markets if growth fears persist—or if rate moves fall short of already dovish investor expectations. “More Fed easing could coincide with higher equity volatility in the event of growth concerns,” the bank said.
Implications for Wealth Advisors
For RIAs and wealth managers, Goldman’s analysis underscores the need to reassess portfolio risk exposure at a time when valuations are stretched and macro headwinds are building. While the S&P 500 is up 10% year-to-date and has gained 29% since its post-Liberation Day low, the risk/reward profile may be shifting.
Key considerations for client portfolios:
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Stress-test equity allocations for potential 10–20% corrections. With indexes near all-time highs, downside scenarios could erase much of this year’s gains in a short window.
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Review volatility assumptions in portfolio models. The VIX’s depressed reading may not fully reflect actual risk. Low implied volatility can lead to underestimating the severity or likelihood of drawdowns.
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Monitor cyclical indicators like payroll growth, manufacturing PMIs, and corporate earnings guidance. Goldman’s business cycle concerns suggest greater sensitivity to incremental economic deterioration.
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Evaluate inflation hedges—particularly for clients with significant exposure to interest rate-sensitive assets. If inflation rises above 3%, traditional fixed income could face renewed pressure.
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Maintain liquidity buffers to give clients flexibility for opportunistic buying during market dislocations.
Tactical Positioning
Advisors may want to consider:
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Diversifying equity exposure toward less cyclical sectors or defensive growth names that can better weather slower GDP growth.
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Exploring alternatives such as managed futures, market-neutral strategies, or structured products to provide downside buffers while retaining equity participation.
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Rebalancing gradually to avoid triggering taxable events while still bringing risk in line with clients’ target allocations.
Big Picture: A Complacency Trap?
Goldman’s warning arrives in a market environment that appears calm on the surface but is vulnerable beneath. The combination of low volatility, stretched valuations, and softening macro data creates conditions in which even modest shocks—such as a surprising inflation print, disappointing jobs data, or a renewed tariff escalation—could trigger outsized reactions.
For advisors, the key takeaway is not necessarily to exit equities, but to recognize that the market’s strong year-to-date performance has occurred against a backdrop where risk premia may be mispriced. This raises the stakes for prudent risk management, scenario planning, and proactive client communication.
The coming months may require balancing participation in the market’s upside with a heightened readiness for rapid, policy-driven, or data-driven volatility spikes. As Goldman’s model suggests, the window for such events may be narrower than the market currently assumes.
