November 4, 2025
After a relentless rally fueled by artificial intelligence enthusiasm, resilient corporate earnings, and a dovish monetary narrative, the mood across Wall Street has shifted toward unease. In the past week, several top banking executives, including Goldman Sachs CEO David Solomon and Morgan Stanley CEO Ted Pick, have warned that the U.S. equity market could experience a 10–20% drawdown within the next 24 months. Such comments—coming from leaders who typically prefer to project confidence—have rattled investors bring us closer to a reckoning with stretched valuations and growing macroeconomic uncertainty. The consensus is not that a deep bear market is imminent, but that the probability of a meaningful correction is rising.
S&P 500
Projected drawdowns of 10-20% correspond with our identified support levels for the S&P 500 at 6147 (-10%) and 5504 (-19.5%).
The anxiety largely stems from valuation fatigue. The S&P 500 has surged well ahead of earnings expectations this year, propelled by a narrow group of mega-cap technology names. The so-called “AI trade” has become both the market’s engine and its potential vulnerability. Even fundamentally strong companies like Palantir and Nvidia now trade at lofty multiples that leave little room for disappointment. Analysts and portfolio managers note that periods of rapid technological adoption often lead to exuberant market pricing before fundamentals catch up. This pattern has repeated across cycles, from the late-1990s dot-com boom to the more recent clean-energy surge, and investors are increasingly mindful that the current AI rally may be entering a more volatile phase.
At the same time, macroeconomic signals have turned mixed. Federal Reserve officials have delivered conflicting messages in recent days, with some emphasizing that policy remains too restrictive while others warn against premature rate cuts. Labor market data have softened, Treasury yields remain volatile, and the U.S. government shutdown—now tied for the longest in history—has raised fresh fiscal and economic concerns. The potential for new trade disruptions adds another layer of uncertainty, as tariff debates reach the Supreme Court and tensions with China continue to simmer over semiconductor and rare-earth supply chains. Even if these risks do not trigger a crisis, they create an environment where sentiment can turn quickly.
Market liquidity and funding conditions have also become focal points of investor concern. Recent commentary from Morgan Stanley and Bank of America suggests that overnight funding markets are showing early signs of stress, while Treasury buybacks and bill issuance schedules may further tighten financial conditions into early 2026. With valuations already elevated, any liquidity shock—no matter how minor—could produce an outsized reaction in equity prices. Moreover, the concentration of market gains in the top ten U.S. stocks has left indices more vulnerable to mechanical drawdowns if those leaders falter.
S&P 500 Negative Breadth Divergence
Breadth measures acted similarly in Q4 of 2024 leading into the market level correction in March – April of 2025
The current nervousness is not driven by one singular risk but rather by the convergence of several—rich valuations, policy uncertainty, narrow leadership, and liquidity sensitivity. Many strategists now argue that a 10–15% pullback would be healthy, allowing valuations to reset and market breadth to improve. In this sense, the conversation has shifted from “if” to “when.” While some investors fear that rising AI-related capital expenditures and widening GAAP-to-pro-forma earnings gaps may signal the early stages of a bubble, others maintain that strong cash generation and robust corporate buyback activity should limit the downside. Either way, volatility looks likely to rise as the market digests the transition from exuberance to normalization.
For investors, the message is clear: caution does not mean capitulation. A measured approach—reducing exposure to the most crowded trades, increasing liquidity buffers, and maintaining diversified sector allocation—may be the prudent path forward. Many professional investors view corrections not as crises but as opportunities to accumulate high-quality assets at more reasonable prices. Yet history suggests that when even the most optimistic voices on Wall Street begin warning of drawdowns, complacency can quickly become costly. With valuations stretched and policy uncertainty still lingering, the next few months could test just how resilient the post-AI bull market really is. We think our readers should keep some powder dry in the near-term with an eye towards taking advantage of opportunities if we get a sentiment reset into year-end.
Sources and References
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Reuters – Morgan Stanley CEO warns market heading toward correction (Nov 4, 2025)
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Bloomberg – Investors take fright at the idea that stocks can go down (Nov 4, 2025)
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Fortune – Goldman Sachs’ Solomon warns of 10–20% market drawdown (Nov 4, 2025)
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Bloomberg – Fed officials split on path toward December rate cut (Nov 3, 2025)
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Bloomberg – Government shutdown now tied for longest on record (Nov 3, 2025)
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Financial Times – AI-capex debt issuance nears one-third of total corporate supply (Nov 2, 2025)
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Reuters – OPEC+ to boost December output, pause hikes in early 2026 (Nov 3, 2025)
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StreetAccount / FactSet – Strategist commentary: breadth improves but Big Tech leadership remains concentrated (Nov 3, 2025)
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Axios / Politico – Senate leaders discuss off-ramp to end government shutdown (Nov 3, 2025)
Additional Charts and Data sourced from FactSet Research Systems
