Wall Street heavyweights flag risk of pullback in equity markets

By Manya Saini and Niket Nishant

(Reuters) -CEOs of Wall Street heavyweights Morgan Stanley and Goldman Sachs on Tuesday cautioned that equity markets could be heading toward a drawdown, underscoring growing concerns over sky-high valuations.

Fears of a market bubble come as the benchmark S&P 500 continues its meteoric climb, repeatedly hitting record highs and evoking memories of the dot-com boom.

“We should welcome the possibility that there would be drawdowns, 10% to 15%, that are not driven by some sort of macro cliff effect,” Morgan Stanley CEO Ted Pick said at the Global Financial Leaders’ Investment Summit in Hong Kong.

Markets have so far largely brushed aside concerns about inflation, elevated interest rates, policy uncertainty from shifting trade dynamics and the ongoing federal government shutdown, now in its fifth week.

“When you have these cycles, things can run for a period of time. But there are things that will change sentiment and will create drawdowns, or change the perspective on the growth trajectory, and none of us are smart enough to see them until they actually occur,” Goldman CEO David Solomon said at the summit.

U.S. MARKETS FALL

Wall Street’s main indexes fell at the open on Tuesday, while the VIX, Wall Street’s “fear gauge,” hovered near a two-week high.

The S&P 500 was last down 1.1%, while the Nasdaq Composite dropped 1.5%. The Dow Jones Industrial Average fell 0.7%.

“Technology multiples are full,” Solomon said, but added that the same does not hold true for the broader market.

His remarks echo the mood among seasoned Wall Street executives, who have front-row seats to market trends. Positioning a pullback as healthy also underscores the degree of exuberance in markets.

Last month, banking giant JPMorgan Chase’s CEO Jamie Dimon had warned of a heightened risk of a significant correction in the U.S. stock market within the next six months to two years.

“I am far more worried about that than others,” Dimon said, according to the BBC, adding there were a “lot of things out there” creating an atmosphere of uncertainty, pointing to risk factors, including geopolitical tensions, fiscal spending and global remilitarization.

Earlier this week, the co-chief investment officers of hedge fund Bridgewater Associates had said that investors are overlooking mounting risks.

AI BOOM OR BUBBLE?

The surge in enthusiasm for generative AI has drawn comparisons to the dot-com bubble, as investors pour billions into technology firms amid soaring valuations and expectations of transformative growth.

“Sometimes, we see bubbles,” hedge fund manager Michael Burry, known for his bearish bet on the U.S. housing market ahead of the 2008 crash, had posted on social media platform X last week along with a picture of his character from the film, The Big Short.

In September, Citigroup said it expects AI-related infrastructure spending by tech giants to surpass $2.8 trillion through 2029, higher than the $2.3 trillion it estimated earlier.

The frenzy is evident across corporate dealmaking. On Monday, OpenAI inked a seven-year, $38 billion agreement to purchase cloud services from Amazon.com.

The dot-com bubble of the late 1990s was fueled by speculative investment in internet-based companies, leading to a surge in tech stock valuations that eventually collapsed in 2000, wiping out trillions in market value.

Still, some analysts say the current AI boom differs from the dot-com era, as the leading companies driving it are supported by solid earnings and tangible business performance.

Last month, Nvidia made history as the first company to reach $5 trillion in market value.

(Reporting by Manya Saini and Niket Nishant in Bengaluru; Editing by Arun Koyyur)