Goldman Sachs' latest analysis finds that UK equity prices have moved rapidly enough since the US-Iran ceasefire to reflect economic conditions that are close to recessionary. In a note circulated by the bank, mid-cap valuations - represented by the FTSE 250 - are described as being consistent with either zero growth or slight contraction in activity.
The brokerage reports the FTSE 250 is trading at the 15th percentile of its own historical price-to-earnings range, placing it well below most other global indices, which Goldman says sit between the 80th and 95th percentiles of their respective P/E ranges. At the same time, the firm's economists have trimmed their forecast for UK Q4-on-Q4 GDP growth to 0.6% from a prior projection of 1.5% that was made before the conflict.
"UK stocks have been quick to discount and are arguably overly discounted in some cases," Goldman wrote, noting that FTSE 250 valuations were "likely consistent with activity running at zero or slightly negative." That assessment follows a brief market reprieve after the US-Iran two-week ceasefire announcement, which spurred a rally in global equities as energy prices eased from earlier highs.
On energy market dynamics, Goldman Sachs' commodities team expects flows through the Strait of Hormuz to begin recovering over the weekend, with Persian Gulf exports gradually returning to pre-conflict levels over about a month. In light of these expectations, the brokerage nudged its Q2 Brent crude forecast down to $90 per barrel while leaving its 2026 Q3 and Q4 Brent forecasts at $82 and $80 per barrel respectively.
The bank also highlights how energy is affecting the inflation profile in the UK. Goldman projects that the energy component's contribution to annual headline inflation will swing from minus 0.1 percentage point in February to plus 0.3 percentage point in March, with further increases expected into April. Separately, the UK purchasing managers index output prices measure rose in March to a level that exceeded what historical relationships with oil and gas prices would have implied, and services-sector pass-through was stronger than in the euro area, the note states.
Sector performance within UK markets has been uneven. Goldman observed that cyclicals have underperformed defensives more sharply in the UK than in the US or the euro area. The FTSE 350's retail stocks fell by more than would be suggested by recent GfK UK Consumer Confidence data alone, indicating an outsized market reaction among domestically oriented consumer names.
Domestic-focused UK stocks, tracked by Goldman via the GSSTUKDE basket, have diverged from their historical relationship with the GBP/USD exchange rate over the past year. Even as sterling strengthened, these domestic names underperformed, pushing their relative performance against the FTSE 100 toward levels near the lows seen in 2022.
Goldman also provides a snapshot of the FTSE 100's valuation and yield metrics. The FTSE 100 closed at 10,603 on April 9, with a 12-month forward price-to-earnings ratio of 13.0 and a dividend yield of 3.3%. By comparison, the S&P 500's forward P/E stands at 20.4. Goldman retains a 12-month price target for the FTSE 100 of 10,800.
Turning to fixed income and real estate signals, Goldman notes that current price moves in real estate and homebuilder stocks imply that higher gilt yields are already priced in. However, given the bank's expectation of weaker economic growth, it anticipates gilt yields will moderate. At the time of the note, the UK 10-year gilt yield was 4.8%, and Goldman forecasts a decline to 4.4% over the next 12 months.
Overall, the brokerage's view ties together a sharp repricing of domestic equities, a downward revision to near-term growth forecasts, and a commodity outlook that assumes a staged recovery in flows and prices following the ceasefire. Goldman stresses that, in places, market moves may have overshot fundamentals, particularly for mid-cap UK stocks that now price in very weak activity.