New York — Wall Street executives are cautioning investors to prepare for a possible decline in the equity markets that could exceed 10% over the next one to two years. They suggest that such a correction may not only be inevitable but could also serve as a healthy reset for an overvalued market.

Mike Gitlin, the president and CEO of Capital Group, emphasized during a financial summit in Hong Kong that while corporate earnings remain robust, elevated valuations present a significant concern. He indicated that the general consensus among investors is that stock valuations are leaning between fair and fully valued, moving away from being considered cheap.

Echoing Gitlin’s sentiments, Ted Pick, CEO of Morgan Stanley, and David Solomon, head of Goldman Sachs, acknowledged the potential for a notable selloff in the near future. Both reiterated that market pullbacks are a common component of economic cycles and can signal necessary adjustments.

Pick pointed out that while markets have made significant gains, there remain risks due to U.S. policy mistakes and global geopolitical tensions. He characterized current market valuations as expensive but noted a narrowing in systemic risks. Between now and 2026, he expects earnings reports to gain importance, with stronger companies likely to thrive while weaker ones lag behind.

Gitlin and Pick suggested that declines of 10% to 15% could be beneficial, describing such market fluctuations as necessary for investors to recalibrate their positions. The S&P 500 is currently trading at a multiple of 23 times forward earnings, surpassing its five-year average of 20. Similarly, the Nasdaq 100 Index is valued at 28 times forward earnings, starkly higher than 19 times just a year ago.

Concerns over inflated valuations are mounting as global stock markets reach new highs despite signs of a slowing U.S. economy and impending government shutdowns. Ken Griffin, CEO of Citadel, cautioned that markets often exhibit irrational behavior at both bullish peaks and bearish lows, highlighting the current climate as nearing excessive bullishness.

While Solomon acknowledged that technology sector valuations appear high, he urged that this does not apply universally across all markets. He advocated for staying invested and reassessing portfolio allocations rather than attempting to time market movements. Solomon observed that significant drawdowns of 10% to 15% are often part of positive cycles and usually do not threaten long-term investment strategies.

Overall, Wall Street leaders advocate for a cautious yet proactive approach in navigating the forecasting landscape of possible market corrections, urging investors to recognize the cyclical nature of equity markets and prepare accordingly for adjustments ahead.