Key Takeaways
- The CEOs of Goldman Sachs and Morgan Stanley warned at a panel on Tuesday that the stock market is likely to experience a correction within the next year or two.
- Their comments spoke to the concerns of some on Wall Street that stock valuations are too high and an AI bubble is forming.
- Bank executives, despite their warnings of a possible drawdown, remain optimistic about the stock market’s outlook.
Some big Wall Street bosses see a stock pullback coming. That doesn’t mean they’re panicking.
Goldman Sachs CEO David Solomon and Ted Pick, of Morgan Stanley, spoke Tuesday during a panel in Hong Kong. Solomon said a 10% to 20% drawdown in equity markets was “likely” in the “next 12 to 24 months,” while Pick suggested that investors should “welcome the possibility” of a 10% to 15% pullback that “are not driven by some macro cliff effect.” (Solomon was reiterating comments made in early October at a conference in Italy.)
Investors didn’t like the sound of that, and markets retreated Tuesday.
Why This Is Significant
Wall Street has become concerned in recent months that the AI investment propelling the stock market to new highs and driving economic growth is also fueling a stock bubble. A brief correction could ease some of those concerns by lowering valuations and resetting investor expectations.
The comments were heeded on Wall Street. The tech-heavy Nasdaq Composite dropped nearly 2% when markets opened on Tuesday, and was recently down about 1.6% amid a broad stock slump. AI stocks with high valuations were among those hardest hit. Software maker Palantir (PLTR) dropped 8% despite blowing past estimates and raising its full-year guidance in its third-quarter earnings report yesterday.
But that doesn’t mean it’s time to flee, according to Solomon. “None of us are market timers,” he said of his Goldman Sachs colleagues on Tuesday. The firm’s advice, he said, is to “look at your portfolio allocation and stay invested. And that advice has served people well.”
Wall Street Increasingly Nervous About AI Bubble
Tuesday’s pullback reflects increasing investor anxiety about the stock market, which has soared to record highs this year despite a litany of economic and geopolitical risks. Big data center and cloud computing deals, meanwhile, have raised concerns that the U.S. is barreling toward a second Dotcom Bubble, when telecommunications companies and investors overestimated how quickly the internet would be commercialized, leading to a glut of infrastructure and stratospheric stock valuations.
And Pick and Solomon aren’t alone in their concerns. In October, JPMorgan Chase CEO Jamie Dimon said a substantial pullback could happen in the next six months to two years, a risk he said the market was underestimating. Fed Chair Jerome Powell nodded to valuation concerns when he called the stock market “fairly highly valued” in September.
“Valuation models indicate that risk asset prices are well above fundamentals, increasing the probability of disorderly corrections when adverse shocks occur,” according to a recent report from the International Monetary Fund.
That such a view isn’t unanimously shared has supported stocks. Some Wall Street analysts note that the tech companies driving today’s AI investments are far more financially secure—and more fairly valued—than those behind the Dotcom boom.
Other bubble skeptics point to interest rates, which the Federal Reserve is expected to lower over the next year, stimulating the economy and preventing the kind of credit crunch that could pop an asset bubble.
Stocks In ‘Pretty Constructive Environment,’ Says Goldman’s Solomon
While bank execs acknowledge stock valuations are stretched, they maintain that the outlook for markets currently skews more positive than negative. “Investors want to take risk, so I’d say the overall environment feels pretty good going forward,” said Pick.
Tech valuations “are kind of 80th percentile in historical context,” Solomon said. “But when you look at the broad market there are lots of things where the multiples aren’t as full, especially given earnings growth.”
Stimulative fiscal policy in most developed markets would also be a tailwind for stocks, he added. “So I think it’s a pretty constructive environment,” said Solomon. “I could give you lots of things that could go wrong, but at the moment those don’t seem likely in the short-term distribution of outcomes.”
Solomon also noted that financial bubbles can inflate for a long time. Former Fed Chair Alan Greenspan, he said, warned of “irrational exuberance” in the stock market in 1996, more than three years before the Dotcom Bubble finally burst.
“Are valuations too high? They are always too high,” CNBC’s Jim Cramer wrote earlier today on X.