US stocks fell Tuesday as the CEOs of Goldman Sachs and Morgan Stanley warned that markets are due for a correction – adding to investor fears that AI stocks have become overvalued.
The Dow Jones Industrial Average plunged 450 points, or 1%, while the S&P 500 and Nasdaq slid 1.2% and 1.7%, respectively.
“It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” Goldman Sachs CEO David Solomon said Tuesday at a financial summit in Hong Kong.
“Things run, and then they pull back so people can reassess.”
Solomon — who previously compared AI stocks to the dot-com bubble of the 1990s — assured investors that such a reversal is typical for long-term bull markets. He added that the bank is still advising clients to stay invested for the long haul.
“A 10 to 15% drawdown happens often, even through positive market cycles,” Solomon said. “It’s not something that changes your fundamental, your structural belief as to how you want to allocate capital.”
Morgan Stanley CEO Ted Pick sang the same tune, claiming investors should even welcome periodic pullbacks because they are a sign of a healthy stock market.
“We should also welcome the possibility that there would be drawdowns, 10 to 15% drawdowns that are not driven by some sort of macro cliff effect,” he said Tuesday at the same conference.
Shares in Palantir plunged 9.7% Tuesday despite an upbeat earnings report as analysts debated whether the company’s valuation has been overblown.
The software giant delivered an enthusiastic forecast, expecting to hit $1.33 billion in revenue for the current period.
Multiple analysts, however, warned that even this achievement might not be enough to justify its soaring valuation. Shares in Palantir have jumped about 175% so far this year.
AI stocks like Oracle, AMD, Nvidia and Amazon also fell 2.4%, 3.6%, 2.5% and 1%, respectively.
It follows a mixed market on Monday, with the S&P 500 and Nasdaq ending higher while the Dow plummeted more than 200 points.
Investors are also worried about potential economic fallout from the government shutdown, which on Tuesday tied the record for longest in history at 35 days.
Federal Reserve Chair Jerome Powell has also warned that stock valuations might be inflated, along with Bank of England Governor Andrew Bailey and the International Monetary Fund.
Both Goldman Sachs and Morgan Stanley said they are remaining bullish on Asia, largely due to a recent trade deal between the US and China.
Goldman said China remains one of the “largest and most important economies” in the world.
“It’s hard not to be excited about Hong Kong, China, Japan and India — three vastly different narratives, but all part of a global Asia story,” said Morgan Stanley’s Ted Pick.
He nodded to China’s AI, electric vehicle and biotech sectors as industries with high growth potential.
