Goldman Sachs Warns of 'Volatility Gap' as Earnings Season Kicks Off

As the fourth-quarter 2025 earnings season kicks into high gear, Goldman Sachs has issued a stark warning: the market is significantly underpricing the potential for explosive stock price movements. In a comprehensive research note released this week, 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.

The timing couldn't be more consequential. Major banks begin reporting next week, followed by a cascade of earnings from technology giants, consumer companies, and industrials. With the S&P 500 trading at elevated valuations after a strong start to 2026, any disappointments could trigger moves that far exceed market expectations.

The 20-Year Low in Expected Volatility

At the heart of Goldman's warning is a striking observation: the average "implied move" for stocks reporting earnings sits at approximately 4.7 percent, representing a 20-year low in expected volatility. This means options traders are betting that stocks will move less in response to earnings than at any point since 2006.

John Marshall, Head of Derivatives Research at Goldman Sachs, highlighted the disconnect in the bank's "Top 25 Tactical Trades" report released January 8. "Markets are pricing earnings reactions as if every company will deliver exactly in-line results with no surprises," Marshall wrote. "History suggests that's rarely how earnings season unfolds."

"The volatility gap represents one of the most significant mispricings we've observed heading into an earnings season. When actual moves inevitably exceed expectations, the repricing could be swift and dramatic."

— John Marshall, Head of Derivatives Research, Goldman Sachs

Why Volatility May Be Underpriced

Several factors suggest earnings reactions could exceed current expectations:

Stretched Valuations Leave No Room for Error

The S&P 500 trades at roughly 22 times forward earnings—a valuation level not seen since the height of the 2021 post-pandemic rally. At these multiples, companies need to deliver not just earnings beats, but strong guidance and confident management commentary. Any shortfall is likely to be punished severely.

Tariff Uncertainty Clouds Outlooks

With the Supreme Court set to rule on the legality of President Trump's tariff authority as early as January 14, corporate executives face unusual uncertainty in crafting their forward guidance. Companies with significant exposure to international trade may deliver cautious outlooks that disappoint investors expecting continued optimism.

AI Monetization Scrutiny Intensifies

After two years of massive AI infrastructure spending, investors are increasingly demanding evidence of return on investment. Technology companies will face pointed questions about when AI investments will translate to meaningful revenue and profit contributions.

Historical Context

Goldman's research team examined previous periods when implied volatility dropped to similar lows. The findings are instructive: in seven of the past ten instances where pre-earnings implied volatility hit multi-year troughs, actual post-earnings moves exceeded expectations by an average of 2.3 percentage points.

This pattern suggests mean reversion is likely. When volatility expectations become too compressed, the actual outcomes tend to deliver larger surprises—in both directions.

The Technical Picture

Adding to the concern, market breadth has narrowed significantly. The "Magnificent Seven" technology stocks have driven the majority of recent index gains, while the average S&P 500 component has underperformed. This concentration creates vulnerability: a stumble by any of the mega-cap leaders could have outsized impact on index-level returns.

Meanwhile, the CBOE Volatility Index (VIX) recently touched its lowest levels since early 2024, suggesting broader market complacency beyond just earnings-specific positioning.

Goldman's Tactical Recommendations

Given the volatility gap, Goldman strategists suggest several tactical approaches for the earnings season:

• Long volatility positions: Buying straddles or strangles on companies with compressed implied volatility could benefit if actual moves exceed expectations.
• Selective stock picking: Focus on companies with clear catalysts and reasonable valuations rather than chasing momentum in extended names.
• Hedging high-beta exposures: Given stretched valuations, protecting gains in growth stocks with put options may offer attractive risk-reward.
• Sector rotation: Consider rotating from crowded technology positions into sectors like healthcare and financials where expectations are lower.

What to Watch Next Week

The earnings calendar features several bellwether reports that will set the tone:

• Tuesday: JPMorgan Chase, Delta Air Lines, Bank of New York Mellon
• Wednesday: Wells Fargo, Citigroup, Bank of America
• Thursday: Morgan Stanley, Goldman Sachs, BlackRock
• Friday: State Street, PNC Financial, M&T Bank

Bank earnings will provide crucial insight into consumer health, loan demand, and capital markets activity. Given that financial sector profits are expected to grow 15 percent year-over-year, any shortfall could trigger the volatility Goldman is warning about.

Implications for Individual Investors

For most investors, the practical takeaway isn't to make dramatic portfolio changes but to ensure appropriate risk management heading into earnings season:

• Review position sizes: If any single stock represents an outsized portion of your portfolio, consider whether you're comfortable with potential post-earnings moves.
• Check stop-losses: Ensure protective stops are in place for speculative positions.
• Maintain diversification: Concentrated portfolios face higher risk during periods of elevated volatility.
• Stay the course: For long-term investors, earnings volatility creates noise, not signal. Focus on fundamentals rather than short-term price swings.

Goldman's warning doesn't mean the market is due for a crash—the bank remains broadly constructive on equities for 2026. But it does suggest that investors have become complacent about near-term risks. When the market is pricing in perfection, even modest disappointments can have outsize consequences.