Global equity markets, which have surged to historic highs this year on the back of artificial intelligence optimism and anticipated interest rate cuts, may soon be due for a sharp correction, according to Goldman Sachs and Morgan Stanley.

The two Wall Street giants, speaking at the Global Financial Leaders’ Investment Summit in Hong Kong on Tuesday, cautioned investors to brace for a “reality check” that could see markets drop by as much as 20% within the next two years.

The warnings come after an extraordinary rally that has added trillions to global market capitalizations. The S&P 500 has risen more than 25% year-to-date, the Nasdaq Composite over 30%, and Japan’s Nikkei 225 has reached levels not seen since 1989. South Korea’s Kospi has also notched record gains, while China’s Shanghai Composite has climbed to its highest in a decade following signs of easing U.S.-China tensions and a weaker dollar that has buoyed exports.

Goldman Sachs CEO David Solomon told investors that the current euphoria was not sustainable indefinitely.

“It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” Solomon said. “Things run, and then they pull back so people can reassess.”

He noted that such reversals were a healthy feature of long-term bull markets, not necessarily the onset of a crisis.

“A 10 to 15% drawdown happens often, even through positive market cycles,” he said. “It’s not something that changes your fundamental belief in how you want to allocate capital.”

Morgan Stanley CEO Ted Pick agreed, saying that markets needed to “cool off” after a period of relentless gains.

“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,” Pick said. “They’re part of the process of price discovery.”

The remarks reflect growing concern among global policymakers and analysts that equity valuations — particularly those of technology and AI-related firms — may be running ahead of fundamentals. The International Monetary Fund warned in its October Global Financial Stability Report that the market’s dependence on AI-linked stocks poses a “concentration risk,” with a handful of companies such as Nvidia, Microsoft, and Alphabet accounting for most of this year’s gains.

U.S. Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey have also voiced similar concerns. Powell noted last week that financial conditions have loosened more than warranted, while Bailey warned that markets are showing signs of speculative excess.

The AI boom has driven an unprecedented “compute race,” with companies investing hundreds of billions of dollars in chips and infrastructure. Nvidia, the poster child of the rally, briefly touched a $4 trillion market capitalization in late October, surpassing Apple and Microsoft at various points this year. This surge has also powered suppliers like TSMC, Broadcom, and ASML to record valuations.

However, Solomon pointed out that markets tend to recalibrate after periods of exuberance. He noted that it’s natural that after big runs, we get periods of digestion, suggesting that investors should prepare for more volatility as interest rate expectations evolve and corporate earnings normalize.

Despite the cautious tone, both Goldman Sachs and Morgan Stanley identified Asia as a region with sustained long-term potential. Solomon said Goldman expects capital flows into Asia to remain strong, particularly after the renewed U.S.-China trade cooperation deal and improving business sentiment.

Morgan Stanley’s Pick highlighted Japan, India, China, and Hong Kong as key investment destinations.

“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,” he said, citing Japan’s corporate governance reforms, India’s infrastructure expansion, and China’s advances in electric vehicles and biotechnology.

In India, the benchmark Nifty 50 index has risen nearly 20% this year, supported by strong GDP growth projections of over 7%, robust foreign direct investment inflows, and record infrastructure spending. Japan’s market, meanwhile, has benefited from corporate reforms aimed at improving shareholder returns and decades-high wage growth that has spurred consumer spending.

China, after years of economic slowdown, has seen a moderate rebound following policy easing measures by Beijing. The U.S.-China trade thaw, signed in late October, has also revived investor confidence, with foreign holdings of Chinese equities climbing to a three-year high, according to Goldman Sachs’ Asia research team.

Still, both banks acknowledged that a correction, even if brief, could test investor sentiment across markets.

As the year winds down, traders are closely watching upcoming U.S. employment and inflation data, which could shape the Federal Reserve’s next rate decision. A stronger dollar, slowing corporate earnings, or geopolitical shocks could all trigger the pullback that Wall Street’s biggest banks now see as increasingly likely.

While the bull run may not be over, Wall Street is warning that the days of effortless gains are numbered.

The bank managing the world’s largest sovereign wealth fund has moved to block Elon Musk’s proposed $1 trillion Tesla pay package, dealing a major blow to the billionaire ahead of the company’s crucial shareholder meeting this Thursday.

Norges Bank Investment Management (NBIM), which manages Norway’s $2 trillion sovereign wealth fund, confirmed on Tuesday that it had voted against Musk’s compensation plan, citing “concerns about the size of the award, dilution, and the lack of sufficient safeguards around key person risk.”

The bank acknowledged the “significant value created under Mr. Musk’s leadership” but said the proposed plan raises governance concerns that outweigh its benefits. NBIM’s decision makes it the largest institutional investor to publicly oppose Musk’s unprecedented compensation deal.

The Norwegian fund, which owns about 1.2% of Tesla, is the company’s sixth-largest institutional investor. Its vote could sway others in the high-stakes shareholder decision that will determine whether Musk secures what would be the largest executive pay package in corporate history.

This is not the first time NBIM has opposed Musk’s compensation. The fund voted against his 2018 package—which a Delaware court later struck down earlier this year—and again opposed a revised version in 2024. Relations between Musk and NBIM CEO Nicolai Tangen have reportedly been tense. In leaked text exchanges from January, Musk told Tangen, “friends are as friends do,” after the fund’s earlier opposition.

Musk’s new pay plan, worth roughly $1 trillion in Tesla stock options, would grant him massive equity rewards if he meets a string of long-term targets, including raising Tesla’s market capitalization to $8.5 trillion, selling one million Optimus humanoid robots, dramatically increasing earnings, and planning his eventual succession.

While Musk argues the package is essential to maintain his focus on Tesla amid his growing involvement in SpaceX, X (formerly Twitter), and xAI, critics say the scale of the compensation is excessive and exposes Tesla to governance risks.

Other major investors have taken sides. The California Public Employees’ Retirement System (CalPERS) and the New York State Retirement Fund have already voted against the plan, joining NBIM in voicing concerns about shareholder dilution and governance standards. Proxy advisory firms Glass Lewis and Institutional Shareholder Services (ISS) have also urged Tesla shareholders to reject the deal.

Musk, in response, lashed out at the firms, calling them “corporate terrorists” during Tesla’s recent earnings call.

Not all large investors are opposed, however. The Florida State Board of Administration and ARK Invest’s Cathie Wood have expressed support for the package, while Vanguard and BlackRock—Tesla’s two biggest institutional shareholders—have yet to reveal their positions.

If approved, the new plan would cement Musk’s fortune far beyond any other CEO in history, potentially making him the world’s first trillionaire. If rejected, it would mark a major governance setback for Tesla’s board and could test the billionaire’s commitment to the automaker at a time when the company faces slowing sales, growing EV competition from China, and investor doubts about Musk’s focus.

Tesla’s shareholders are set to cast their votes at the company’s annual general meeting on Thursday, in what analysts are describing as one of the most consequential corporate decisions of the decade.