Wall Street CEOs Warn of Market Pullback From Rich Valuations

(Bloomberg) — Wall Street chief executives said investors should brace for an equity market drop of more than 10% in the next 12 to 24 months, and that such a correction may be a positive development.

Corporate earnings are strong but “what’s challenging are valuations,” said Mike Gitlin, who helps oversee about $3 trillion as president and chief executive officer of investment manager Capital Group, during a financial summit organized by the Hong Kong Monetary Authority on Tuesday.

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On whether stocks are cheap, fair or fully valued, Gitlin said most people “would say we’re somewhere between fair and full, but I don’t think a lot of people would say we’re between cheap and fair,” he said. The same goes for credit spreads, Gitlin added.

His views were echoed by Morgan Stanley CEO Ted Pick and Goldman Sachs Group Inc.’s David Solomon, who also see the possibility of a significant selloff in the coming period and said pullbacks are a normal feature of market cycles.

Pick said markets have come a long way, but there’s still “policy error risk” in the US and geopolitical uncertainty.

“Yes markets seem expensive…but the reality is that systematic risk has probably narrowed,” he said. There will be more focus on company earnings in 2026 and there will be greater dispersion, where stronger firms will outperform while weaker ones will lag, he said. In addition, the new issue market is active around the world “and investors want to take risks.”

“We should also welcome the possibility that there would be 10 to 15% drawdowns that are not driven by some sort of macro-cliff effect,” Pick said, calling that “a healthy development.”

The S&P 500 index is trading at 23 times forward earnings estimates, above its five-year average of 20 times. Similarly, the Nasdaq 100 Index fetches a multiple of 28 times, compared with nearly 19 times in 2022. Futures on the tech-heavy gauge dropped as much as 1.4% on Tuesday, with AI bellwether Palantir Technologies Inc. declining more than 4% in extended trading on worries about the company’s lofty valuation after a record run-up.

Concerns about rich valuations have intensified after global equities repeatedly hit new highs this year despite a slowing US economy and a government shutdown.

Markets are most irrational at the heights of a bull market and the depths of a bear market, said Citadel Chief Executive Officer Ken Griffin, who added that now “we are very deep into a bull market.”

Solomon said “technology multiples are full,” but that’s not the case for the whole market. He said Goldman’s advice to clients has been to stay invested, to look at their portfolio allocations, and avoid trying to time the market.

He added that equity market drawdowns of 10% to 15% also often occur through positive cycles without altering the general direction of capital flows or long-term allocations.

“It just means things run and then they pull back so people can reassess,” Solomon said.

–With assistance from Winnie Hsu.

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