Goldman Sachs, Morgan Stanley warn of a market correction

Global markets may be in for a reality check after this year’s sustained rally, as Goldman Sachs and Morgan Stanley warned investors on Tuesday to brace for a downturn over the next two years.

Stocks around the world have soared this year, reaching record levels, driven by AI-driven gains and interest rate cut expectations. Last month, major US indices climbed to new highs; While Japan’s Nikkei 225 and South Korea’s Kospi index reached new peaks, China’s Shanghai Composite index reached its strongest level in the last decade as US-China tensions eased and the dollar weakened.

“There will probably be a 10 to 20% decline in equity markets over the next 12 to 24 months,” Goldman Sachs CEO David Solomon said at the Global Financial Leaders Investment Summit in Hong Kong. “Things are going well and then they step back so people can re-evaluate.”

But Solomon noted that such reversals are a normal feature of long-term bull markets, noting that the investment bank’s consistent advice to clients is to stay invested and review portfolio allocation rather than trying to time the markets.

“Even in positive market cycles there is often a 10 to 15% decline,” he said. “This is not something that will change your fundamental, structural belief about how you want to allocate capital.”

Speaking at the same panel, Morgan Stanley CEO Ted Pick said investors should welcome periodic pullbacks and that these are healthy developments rather than signs of crisis.

“We should also welcome the possibility that there could be declines of 10 to 15 percent that are not due to some sort of macro cliff effect,” he said.

Solomon and Pick’s comments come after recent warnings A possible sharp correction by the IMFFederal Reserve Chairman Jerome Powell and Bank of England Governor Andrew Bailey also warned about inflated stock valuations.

Bright spots in Asia

Goldman Sachs and Morgan Stanley pointed to Asia as a bright spot for the next few years following recent developments, including the trade deal between the US and China. Goldman said it expects global capital allocators to remain interested in China, adding that China remains one of the world’s “largest and most important economies.”

Morgan Stanley remains bullish on Hong Kong, China, Japan and India due to their unique growth stories. Japan’s corporate governance reforms and India’s infrastructure building have been chosen as multi-year investment themes.

“It’s hard not to get excited about Hong Kong, China, Japan and India—three very different narratives, but all part of a global Asian story,” Ted said. He particularly highlighted the artificial intelligence, EV and biotechnology sectors in China.