Goldman Sachs cut its S&P 500 price target as commodity prices take a bite out of earnings and sees a 40% chance of recession

• Goldman Sachs cut its S&P 500 price target to 4700 and said there's a 40% chance of an economic recession.
• The bank said surging commodity prices and slowing economic growth will take a bite out of earnings.
• "Extremely low levels of equity market liquidity have amplified the impact of widespread investor selling," Goldman said.

Positive outlooks for the US stock market are deteriorating on Wall Street, with Goldman Sachs the latest bank to lower its year-end S&P 500 price target in a Friday note.

The bank dropped its price target to 4700 from 4900, after already lowering its year-end S&P 500 price target to 4900 from 5100 in February. The less bright outlook from the bank is due to the expectation that surging commodity prices and slowing economic growth will take a bite out of corporate earnings this year.

The bank sees the S&P 500 generating $221 in 2022 earnings per share, representing year-over-year growth of 5%. And much of that stems from the energy sector, which is benefitting from the recent surge in oil prices due to supply concerns related to Russia's invasion of Ukraine. Excluding the energy sector, Goldman expects the S&P 500 to grow its earnings per share by only 2% in 2022.

Despite the price cut, investors would likely be satisfied if 4700 proves to be where the S&P 500 lands at year-end, as it represents 12% potential upside from Friday's close. That would erase much of the stock market's current 12% decline, which has been exacerbated by a period of low liquidity.

"Amid poor market liquidity, highly liquid stocks have underperformed less liquid peers, as is typically the case during market sell-offs and periods of tightening financial conditions," Goldman said.

What should be more concerning to investors than Goldman's year-end price target is that it sees a 40% chance that the US is on the path to an economic recession, a scenario that would likely spell even more risk for the stock market.

"In a downside scenario, we expect reduced earnings and valuation multiples would cause the S&P 500 to decline by 15% to 3600, in line with the median historical peak-to-trough price decline of 24% around past recessions," according to the note.

But if the current correction in the stock market is only that, a typical correction, then this could be time to buy. "10%+ S&P 500 corrections typically represent good buying opportunities, with a median subsequent 12-month return of 15%," Goldman said.

Investors should position their portfolio to be overweight energy and healthcare stocks, as both are defensive in nature and still trade at a discount to their historical valuations, the bank recommended. Additionally, dividend stocks should provide a layer of protection to investors due to healthy cash flows, elevated cash balances, and low trailing payout ratios among most dividend payers.