Goldman Sachs and Morgan Stanley bosses see a big stock market correction coming

The heads of Goldman Sachs, Morgan Stanley and other Wall Street giants think global markets are nearing a comedown after the highs of recent months.

Equities have soared this year as investors piled into artificial intelligence-linked stocks and cheered rate cutting cycles in the U.S. and beyond. The S&P 500, the Dow Jones and the Nasdaq have hit record highs this year. So have Japan’s Nikkei 225, South Korea’s Kospi and major European indices like the FTSE 100. 

They are in line for a rude awakening soon, according to Goldman Chief Executive David Solomon. “It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” he said, speaking at the Global Financial Leaders’ Investment Summit in Hong Kong. “Things run, and then they pull back so people can reassess.”

He added that pullbacks like this are normal when markets are on a roll longer term. “A 10 to 15% drawdown happens often, even through positive market cycles,” he said. “It’s not something that changes your fundamental, your structural belief as to how you want to allocate capital.”

Also at the event, Morgan Stanley CEO Ted Pick said investors should even “welcome the possibility” of drawdowns, and that they are healthy when they are “not driven by some sort of macro cliff effect.”

The boss of investment giant Capital Group, which manages $3 trillion, agreed. Mike Gitlin said that while corporate earnings are healthy, valuations are “challenging.” Referring to whether stocks are over or undervalued, he said most people would say they are “somewhere between fair and full, but I don’t think a lot of people would say we’re between cheap and fair.”

The comments come after Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey raised concerns about the possibility that stocks are overvalued in recent weeks.

The International Monetary Fund also warned last month that there are "echoes" of the 1990s dot-com boom in the current explosion of AI-related spending by U.S. companies. “It was the internet then. It is AI now," said Pierre-Olivier Gourinchas, director of the IMF's research department in mid-October.

Gourinchas added at the time that surging valuations, booming investment and robust consumer consumption in the sector has kept U.S. economic growth on solid footing. "Whether this will be followed by a market correction, I don't think anyone can tell for sure," he said.

—Joseph Zeballos-Roig contributed to this article.