Leading Wall Street investment banks Goldman Sachs (GS) and Morgan Stanley (MS) are each warning of a market correction as U.S. stocks hover near all-time highs.
Analysts at each investment bank say that investors should position their portfolios for a pullback over the next two years.
Despite rising geopolitical uncertainty and uneven economic data, equities have soared this year, fueled by hype surrounding artificial intelligence (A.I.) and hitting record highs as a result.
Over the past month, all three of the main U.S. indices have hit new heights, as have Japan’s Nikkei 225 and South Korea’s Kospi. China’s Shanghai Composite index is at its highest level in a decade.
However, analysts at Goldman Sachs and Morgan Stanley say that the good times might not last much longer.
“It’s likely there’ll be a 10% to 20% drawdown in equity markets sometime in the next 12 to 24 months,” says Goldman Sachs.
The investment bank notes that corrections of 10% and a bear market caused by a 20% decline or more are normal features of long-term bull markets and should be expected.
Goldman Sachs says it is advising clients to stay invested but review their portfolio allocation and not attempt to time the stock market.
For its part, Morgan Stanley says investors should welcome periodic pullbacks, calling them healthy developments and buying opportunities rather than signs of a crisis.
The warnings from Wall Street come after the International Monetary Fund (IMF) recently warned of a potential sharp correction in U.S. stocks.
U.S. Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey have urged caution related to what they each call “inflated stock valuations.”
Both Goldman Sachs and Morgan Stanley point to Asia as a potential bright spot in the next few years, notably China.
Goldman Sachs says that China remains one of the “largest and most important economies” in the world.
Morgan Stanley is bullish on Hong Kong, China, Japan and India due to their rapid and continued economic growth.
The stocks of Goldman Sachs and Morgan Stanley are each up more than 30% this year.
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