Wall Street Rally Meets Banking Giants’ Correction Warnings
NEW YORK (AP) — U.S. stock markets surged Monday on optimism that the government shutdown would soon end, but the celebration was tempered by warnings from Goldman Sachs and Morgan Stanley that a significant correction is likely over the next two years.
The S&P 500 climbed 1.5%, the Nasdaq jumped 2.2% and the Dow Jones Industrial Average gained more than 350 points as investors cheered progress on a Senate funding bill. But at an investor conference in Hong Kong, leaders of two Wall Street powerhouses cautioned that current valuations set the stage for a painful pullback.
Rally Driven by Political Progress
Monday’s gains reflected relief that the 42-day government shutdown appeared near its end. The Senate passed a funding package 60-40, sending it to the House where a vote could come Wednesday.
“Markets hate uncertainty more than they hate bad news,” said Marcus Chen, a portfolio manager at Fidelity Investments. “The shutdown created fog around economic data, Federal Reserve policy and recession risks. Now we have some clarity.”
Technology stocks led the advance, with the Nasdaq Composite posting its biggest one-day gain in three weeks. The rally extended to cryptocurrency markets, where Bitcoin rebounded to $105,420 after falling below $100,000 last week.
| Monday Closing Prices | Level | Change | Percentage | 52-Week High |
| S&P 500 | 6,846.61 | +103.42 | +1.54% | 6,892.47 |
| Nasdaq Composite | 15,247.88 | +340.17 | +2.28% | 15,402.29 |
| Dow Jones Industrial | 43,621.55 | +352.14 | +0.81% | 44,123.89 |
| Russell 2000 | 2,341.67 | +28.93 | +1.25% | 2,458.31 |
| Bitcoin | $105,420 | +$2,100 | +1.98% | $109,800 |
Banking CEOs Sound Alarm
Even as markets rallied, Goldman Sachs CEO David Solomon delivered a sobering assessment at the Global Financial Leaders’ Investment Summit in Hong Kong.
“It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” Solomon told the conference audience.
Morgan Stanley CEO Ted Pick echoed the warning. “Things run and then they pull back,” Pick said. “It’s the nature of markets.”
The predictions weren’t random speculation. Both executives cited concerns about elevated valuations, persistent inflation and economic uncertainties created by the shutdown as reasons to expect a correction.
Dr. Samantha Chen, Goldman Sachs chief economist, elaborated on the risks. “Markets are pricing in perfection – continued earnings growth, declining inflation, Federal Reserve rate cuts and economic expansion,” Chen said. “If any of those assumptions prove wrong, valuations have to adjust.”
Valuation Concerns
The S&P 500 currently trades at 22.9 times forward earnings, well above the historical average of 16-17 times. That premium reflects optimism about corporate profits and artificial intelligence driving growth.
But skeptics question whether expectations are realistic. Tech sector valuations assume AI will generate trillions in new profits – an outcome that remains unproven.
“We’ve seen this pattern before with new technologies,” said Professor Kevin Warsh, a former Federal Reserve governor. “Initial excitement drives valuations up, then reality sets in and markets correct. AI might be different. Or it might not be.”
Corporate earnings have been strong, with S&P 500 companies tracking 12% growth in the third quarter. Tech companies led with 22% gains. But economists caution that shutdown damage hasn’t fully appeared in the data.
Economic Headwinds
The government shutdown inflicted damage that markets may not fully appreciate. Consumer confidence plunged to 63.8 in November, barely above the 2008 financial crisis low of 50.0.
More than 4,200 small businesses dependent on government contracts filed for bankruptcy during the shutdown. Federal workers depleted savings. Economic data releases were delayed, creating uncertainty for Federal Reserve policymakers.
“The Fed is trying to navigate monetary policy without critical data,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “Consumer Price Index and Producer Price Index reports were delayed indefinitely. They’re making decisions blind.”
The Fed cut rates 25 basis points in October to 3.75-4%, citing weak employment trends despite inflation running at 3% – above the 2% target. Internal disagreement over further cuts has grown, with December action no longer certain.
| Key Economic Metrics | Current | Previous Quarter | Year Ago | Fed Target |
| GDP Growth (Q3) | 2.8% | 3.1% | 2.4% | 2.0-2.5% |
| Unemployment | 4.1% | 3.8% | 3.7% | ~4.0% |
| Core Inflation (CPI) | 3.0% | 3.2% | 3.7% | 2.0% |
| Fed Funds Rate | 3.75-4.0% | 4.0-4.25% | 4.75-5.0% | Data dependent |
| Consumer Confidence | 63.8 | 68.1 | 71.2 | N/A |
Asia Opportunity
Despite U.S. market concerns, both Goldman and Morgan Stanley expressed optimism about Asian investment opportunities over the next several years.
Recent trade agreements between the U.S. and China eased tensions. China’s Shanghai Composite Index reached its highest level in a decade. Japan’s corporate governance reforms and India’s infrastructure development offer multi-year growth themes.
“It’s hard not to be excited about Hong Kong, China, Japan and India,” Pick said. “Three vastly different narratives, but all part of a global Asia story.”
Solomon agreed China “remains one of the largest and most important economies” despite challenges. Goldman expects continued global investment interest in Chinese markets.
Asian stocks have outperformed U.S. markets recently. The Shanghai Composite gained 18.4% year-to-date, Japan’s Nikkei rose 22.7%, and India’s Sensex climbed 15.8%.
Treasury Auctions Test Demand
The Treasury Department scheduled $58 billion in 3-year note auctions starting Tuesday, followed by 10-year notes Wednesday and 30-year bonds Thursday. Results could influence market direction.
Poor auction performance would force yields higher to attract buyers, increasing borrowing costs throughout the economy. The 10-year Treasury yield stands at 4.09%, up from levels before the Fed’s October rate cut.
“Treasury yields haven’t declined despite economic worries,” Jones said. “That signals investor concerns about inflation and government debt. Poor auctions could send yields higher, pressuring stock valuations.”
Higher yields make bonds more attractive relative to stocks and increase corporate borrowing costs, potentially slowing economic growth.
Betting Restrictions
In separate news, Major League Baseball announced agreements with sportsbooks to ban pitch-by-pitch betting following federal indictments of two Cleveland Guardians players for allegedly rigging games to benefit gamblers.
The restrictions, effective immediately, eliminate individual pitch outcome bets and limit prop bet amounts to $5,000. MLB faced criticism for pursuing gambling partnerships without adequate integrity safeguards.
Investor Strategies
Financial advisers recommended maintaining diversification and cash reserves rather than making dramatic portfolio changes based on correction warnings.
“This isn’t the time to sell everything, but it’s not the time for complacency either,” Chen said. “A 10-20% correction is normal market behavior. The key is having a plan for how you’ll respond.”
Chris Versace, chief investment officer at Tematica Research, emphasized perspective. “Investors who build wealth are the ones who don’t panic during corrections,” Versace said. “They stick to their plan and potentially buy when prices are lower.”
Professional investors reported reducing U.S. stock exposure, increasing Asian market positions, and building cash reserves to deploy during potential pullbacks.
Differing Outlooks
Market forecasts ranged widely. Optimists see temporary weakness setting up strong 2026 gains as the Fed navigates economic challenges. Pessimists warn persistent inflation could force prolonged high rates, triggering deeper downturns.
The middle ground – shared by many professionals – expects Goldman and Morgan Stanley’s 10-20% correction but views it as manageable rather than catastrophic.
“My base case is a correction in first-half 2026, probably 12-15%,” Chen said. “It’ll feel uncomfortable, but it’ll create opportunities. By second-half 2026, markets will likely recover as the Fed responds and the economy stabilizes.”
What’s Next
Markets face multiple challenges ahead: House vote on the shutdown deal, Treasury auctions, delayed economic data releases, and Federal Reserve’s December policy meeting. Each could trigger volatility.
Solomon’s message resonated: corrections are inevitable, and current conditions suggest one is approaching. The question isn’t if, but when – and whether investors are prepared.
“Markets are forward-looking,” Solomon said. “Right now they see soft landing, controlled inflation and AI-driven growth. But markets can be wrong. The question is whether you’re ready when reality differs from expectations.”
