As the Fourth Quarter 2025 earnings season kicks into high gear this January 2026, Goldman Sachs (NYSE: GS) has issued a stark warning to institutional and retail investors alike: the market is significantly underpricing the potential for explosive stock price movements. Strategists at the investment bank argue that the "volatility gap" between what the options market expects and what reality is likely to deliver has reached a critical juncture, suggesting that the coming weeks could be some of the most turbulent for equity markets in recent years.

The warning comes at a time when the S&P 500 is trading at a demanding 22x forward earnings—a valuation level not seen since the height of the 2021 post-pandemic rally and dangerously close to the peaks of the 2000 dot-com bubble. With investor positioning heavily concentrated in a handful of mega-cap names and hedging activity at multi-year lows, Goldman Sachs suggests that even minor earnings misses or slightly conservative guidance could trigger outsized downward corrections that the options market has yet to factor in.

The "Volatility Gap": A 20-Year Low in Expectations

In a comprehensive "Top 25 Tactical Trades" report released on January 8, 2026, John Marshall, Head of Derivatives Research at Goldman Sachs, highlighted a dangerous disconnect in current market pricing. According to Marshall’s analysis, the average "implied move" for stocks reporting earnings—the price swing that options traders are currently betting on—sits at approximately ±4.7%. This represents a 20-year low in expected volatility. However, the "realized moves"—the actual price swings recorded on earnings days over the past two quarters—have been trending toward levels not seen since the 2009 financial crisis.

This discrepancy suggests that the options market is being far too complacent. Goldman’s strategists pointed out that options volumes in the two weeks leading up to this season were unusually thin, indicating that many market participants have not yet protected their portfolios against potential shocks. This lack of hedging creates a "coiled spring" effect; if a major company reports disappointing results, the rush to exit or hedge positions simultaneously could exacerbate price drops, leading to the very volatility the market failed to price in.

The timeline leading up to this warning has been marked by a series of macroeconomic shifts. Just days prior, on January 7, 2026, Goldman’s Chief US Equity Strategist Ben Snider warned of "high valuations, high concentration, and high gains" that have left the market structurally fragile. With the top 10 stocks now making up a staggering 41% of the S&P 500’s total market capitalization, the broader index has become increasingly sensitive to the fortunes of a very small group of companies, further amplifying the potential for systemic volatility.

Winners, Losers, and the "Priced for Perfection" Trap

The Goldman Sachs report identifies several specific companies likely to see significant price action, categorized by their fundamental outlook versus market expectations. Among the potential winners, Meta Platforms (NASDAQ: META) and UnitedHealth (NYSE: UNH) are highlighted as having significant upside potential. Goldman’s analysts believe that the market is underestimating Meta’s efficiency gains from its latest AI integration, while UnitedHealth is expected to benefit from better-than-anticipated medical loss ratios that have not yet been reflected in its current share price.

Conversely, the firm flagged several "downside risks" where the margin for error is razor-thin. Texas Instruments (NASDAQ: TXN) and Southwest Airlines (NYSE: LUV) were specifically mentioned as being vulnerable. For Texas Instruments, concerns over a slowdown in industrial chip demand and rising inventory levels suggest that its current valuation may be unsustainable. Southwest Airlines faces continued margin pressure from rising labor costs and a competitive domestic landscape, leading Goldman to predict a sharper-than-expected reaction if their guidance fails to impress.

Perhaps the most significant sector-wide risk involves defense contractors like Lockheed Martin (NYSE: LMT). The broader market is currently grappling with early 2026 policy shifts from the Trump administration, including threats to block dividends and stock buybacks for defense firms until specific production benchmarks are met. This political overhang, combined with Goldman’s volatility warning, suggests that the industrial and defense sectors could face a particularly rocky reporting period as investors weigh regulatory risks against fundamental performance.

Wider Significance: A Fragile Macroeconomic Backdrop

The Goldman Sachs warning does not exist in a vacuum; it fits into a broader trend of market exhaustion following a multi-year bull run. The current S&P 500 P/E ratio of 22x implies that investors are "pricing for perfection," leaving no room for the "sticky" inflation currently hovering near 3%. While the Federal Reserve has moved into an easing cycle, with rates currently around 3.75%, the uncertainty regarding the pace of future cuts—a "hawkish pause"—has left the market sensitive to any data that suggests the Fed might stay higher for longer.

Historically, when implied volatility is this low while realized volatility is rising, it often precedes a period of "regime change" in the market. The last time such a gap was this pronounced was in late 2019, just before the volatility spikes of early 2020. The current concentration of the market (41% in the top 10 stocks) also mirrors the late 1990s, a period where idiosyncratic earnings misses from a few leaders eventually led to broader market contagion.

Furthermore, the geopolitical environment of early 2026, characterized by aggressive tariff rhetoric and domestic policy shifts, adds a layer of "non-fundamental" risk that traditional earnings models struggle to quantify. Goldman’s warning suggests that we are entering a phase where "macro" and "micro" risks are converging, making it increasingly difficult for the options market to accurately price the tail risks of this earnings season.

What Comes Next: Strategic Pivots and Market Scenarios

In the short term, Goldman Sachs recommends that investors move away from selling volatility and instead consider buying "straddles"—options strategies that profit from large moves in either direction. This pivot reflects a shift from a "buy the dip" mentality to a "prepare for the swing" strategy. If Goldman’s thesis holds true, the next four weeks will see a series of 5% to 10% moves in major indices, which could force institutional managers to rebalance their portfolios aggressively, potentially leading to a broader rotation out of overvalued tech and into defensive sectors.

Long-term, this volatility could serve as a necessary "clearing event" for the market. A period of outsized price moves often helps to reset valuations to more sustainable levels, flushing out speculative positioning. However, if the earnings reports are significantly worse than expected, it could signal the beginning of a more prolonged correction, especially if the "dividend blocks" and "tariff threats" currently being discussed by the administration begin to materialize into concrete policy.

Market participants should watch for "volatility expansion" in the coming days. If the first wave of major bank earnings results in price swings that exceed their 1-day implied moves, it will serve as a confirmation of Goldman’s warning. Investors may need to adapt by increasing cash positions or utilizing derivatives to hedge against a potential "gamma squeeze" to the downside.

Final Assessment: Navigating the 2026 Earnings Storm

The key takeaway from Goldman Sachs’ latest research is clear: the safety net provided by the options market is currently an illusion. With implied volatility at 20-year lows and valuations at historic highs, the market is effectively walking a tightrope without a harness. The "volatility gap" identified by John Marshall and his team suggests that the Q4 2025 earnings season will be defined by "idiosyncratic shocks" that could have systemic implications for the broader S&P 500.

Moving forward, the market is likely to remain on edge until there is more clarity on both corporate guidance and the evolving policy landscape in Washington. The era of "low-volatility growth" may be coming to a close, replaced by a more fragmented and reactive trading environment. For investors, the coming months will require a high degree of selectivity and a renewed focus on risk management.

Investors should closely monitor the reporting dates for Meta Platforms and UnitedHealth for signs of fundamental resilience, while keeping a wary eye on the defense and industrial sectors for signs of policy-induced stress. As the reporting season unfolds, the ability to distinguish between "noise" and "structural shifts" will be the difference between weathering the storm and being swept away by it.

This content is intended for informational purposes only and is not financial advice.