While the US stock markets have been strong and look on track to deliver double-digit returns for the third consecutive year, some observers have been warning of a drawdown. Joining the ranks is Goldman Sachs CEO David Solomon, who has warned of a drawdown in stock markets over the next couple of years.

Solomon Warns of a Stock Market Drawdown

“Markets run in cycles, and whenever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation, and therefore lots of interesting new companies around it, you generally see the market run ahead of the potential … there are going to be winners and losers,” said Solomon on Friday at Italian Tech Week in Turin, Italy.

Referring to the dot-com bubble, he said, “You’re going to see a similar phenomenon here.” The Goldman Sachs CEO added, “I wouldn’t be surprised if in the next 12 to 24 months, we see a drawdown with respect to equity markets … I think that there will be a lot of capital that’s deployed that will turn out to not deliver returns, and when that happens, people won’t feel good.”

Solomon On AI Bubble

“I’m not going to use the word bubble, because I don’t know, I don’t know what the path will be, but I do know people are out on the risk curve because they’re excited,” said Solomon.

He added, “And when [investors are] excited, they tend to think about the good things that can go right, and they diminish the things you should be skeptical about that can go wrong … There will be a reset, there will be a check at some point, there will be a drawdown. The extent of that will depend on how long this [bull run] goes,” he added.

Meanwhile, even as many see AI as a bubble, Solomon is quite upbeat on the technology. He said, “Generally speaking, I think what’s super exciting is the technology is expanding, new companies are being formed, and the potential of this technology deployed into the enterprise can be very, very powerful. So, it’s an exciting time.”

Jerome Powell On Stock Market Valuations

To be sure, Solomon is not the only observer who sees the US markets as overstretched, and several other leading personalities have made similar observations. Last month, Fed chair Jerome Powell stated that “equity prices are fairly highly valued” when asked about the Fed’s risk tolerance. Some market watchers have interpreted this candid observation about high stock prices as reminiscent of former Fed Chair Alan Greenspan’s famous “irrational exuberance” comment before the dot-com bubble burst.

Warren Buffett Indicator Flashes Red Sign For Stock Markets

The US market cap-to-GDP indicator has surpassed 200%, a threshold that Warren Buffett once warned is akin to “playing with fire.”

Buffett considers the ratio to be “probably the best single measure of where valuations stand at any given moment.” Historically, it has averaged 85% since the 1970s. Because of this, a ratio above 100% is often viewed by some analysts as a strong signal of overvaluation.

Warren Buffett has been actively selling shares, making Berkshire Hathaway a net seller for the last eleven consecutive quarters.

During this year’s annual shareholder meeting, Buffett said, “We have made a lot of money by not wanting to be fully invested at all times.”

He also alluded to stocks being overvalued in this year’s shareholder letter and said, “We are impartial in our choice of equity vehicles, investing in either variety based upon where we can best deploy your (and my family’s) savings.” The “Oracle of Omaha” added, “Often, nothing looks compelling; very infrequently, we find ourselves knee-deep in opportunities.”

US Stock Markets Are Not Looking Cheap

Notably, several indicators show that US stock markets are trading at elevated levels by historical standards. These include

• Shiller CAPE Ratio (Cyclically Adjusted P/E): This ratio, which measures price against the average of the last ten years of inflation-adjusted earnings, is currently at levels rarely seen in history, second only to the peak before the 2000 tech crash. Experts view this as a strong indicator of low forward returns over the next decade.
• Price-to-Book Ratio: Analysts at major institutions, including Bank of America, have noted that the S&P 500’s price-to-book ratio has surpassed its peak from the 2000 bubble, suggesting that the market’s aggregate value is trading at an all-time high multiple compared to companies’ net assets.
• Forward P/E Ratio: This ratio, one of the most widely followed and easily understood, is currently running ahead of historical averages.

Stock Market Rally Has Been Quite Shallow

The bull market’s gains have been heavily concentrated in a handful of “Magnificent Seven” large-cap technology companies, largely driven by optimism around Artificial Intelligence (AI). This narrow leadership is a cause for concern, as when only a few stocks are driving the entire index higher, it signals weak “market breadth.” Several indices used to confirm the health of the rally—such as the Equal-Weighted S&P 500 and Small Caps—have failed to keep pace, suggesting the underlying market may be less healthy than the headline index indicates.

Fed Rate Cut Has Boosted Sentiments

Meanwhile, the Fed cut the federal funds rate by 25 basis points at its September 2025 meeting, which helped lift sentiments. This was the first rate cut in several months and was generally interpreted as a response to a weakening job market. The rate cuts signal the Fed is currently more focused on propping up the job market and economic growth, which has shown signs of moderation this year.

Many analysts and the median of the Fed’s own projections (the “dot plot”) suggest two more cuts of 25 basis points are likely before the end of 2025. This would bring the rate down to a range of 3.5%–3.75%.

Stocks generally benefit from falling rates, especially if the cuts occur without a recession.