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

Equities worldwide have been soaring, hitting record highs this year, driven by AI-linked gains and expectations of rate cuts. Over the past month, key U.S. indexes have scaled new peaks, Japan’s Nikkei 225 and South Korea’s Kospi have hit fresh highs, while China’s Shanghai Composite has notched its strongest level in a decade on easing U.S-China tensions and a softer dollar. 

“It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” said Goldman Sachs CEO David Solomon at the Global Financial Leaders’ Investment Summit in Hong Kong. “Things run, and then they pull back so people can reassess.”

However, Solomon noted that such reversals were a normal feature of long-term bull markets, noting that the investment bank’s standing advice to clients remains to stay invested and review portfolio allocation, not attempt to time markets.

“A 10 to 15% drawdown happens often, even through positive market cycles,” he 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, speaking at the same panel, said investors should welcome periodic pullbacks, calling them healthy developments rather than signs of crisis.

“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. Just the reality that … I think that’s a healthy development,” he said.

Solomon and Pick’s views come on the back of recent warnings by the IMF of a possible sharp correction, while Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey have also cautioned about inflated stock valuations.

Bright spots in Asia

Goldman Sachs and Morgan Stanley pointed to Asia as a bright spot in the next few years on the back of recent developments including the trade pact between the U.S. and China. Goldman expects global capital allocators to continue to be interested in China, adding that it remains one of the “largest and most important economies” in the world.

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 build-out were singled out as multi-year investment themes.

“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,” Ted said. He highlighted the AI, EV and biotech sectors in China particularly.