Close Menu
Invest Intellect
    Facebook X (Twitter) Instagram
    Invest Intellect
    Facebook X (Twitter) Instagram Pinterest
    • Home
    • Commodities
    • Cryptocurrency
    • Fintech
    • Investments
    • Precious Metal
    • Property
    • Stock Market
    Invest Intellect
    Home»Stock Market»Why Warren Buffett’s favorite valuation indicator is flashing a warning for stocks
    Stock Market

    Why Warren Buffett’s favorite valuation indicator is flashing a warning for stocks

    July 20, 20243 Mins Read


    warren buffett

    Warren BuffettREUTERS/Rick Wilking

    • The Buffett Indicator is indicating US stocks might be overvalued.

    • The indicator was coined by Warren Buffett and measures the total US market cap to GDP.

    • “If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire,” Buffett said in a 2001 Fortune article.

    Warren Buffett’s favorite stock market valuation indicator just hit a record high, signaling that stocks might be highly overvalued.

    The Buffett Indicator, which measures the total market cap of US stocks relative to US GDP, hit an all-time peak of 200% on Monday, surpassing the record high of 197% reached in November 2021.

    In other words, the US stock market’s total market cap of about $55 trillion, as measured by the Wilshire 5000 index, is about double the size of annualized US GDP, which is at about $27 trillion.

    The stock market experienced a painful year-long bear market shortly after the Buffett Indicator peaked in November 2021.

    In a 2001 Fortune article, Buffett called the indicator “probably the best single measure of where valuations stand at any given moment.”

    When the indicator reached an “unprecedented level” during the 2000 dot-com bubble of about 190%, “that should have been a very strong warning signal,” Buffett said in the article.

    “For me, the message of that chart is this: If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire,” Buffett said.

    Fast forward to 2024, and it appears investors are playing with fire.

    In a note on Thursday, B. Riley strategist Paul Dietrich pointed to the unprecedented reading in the Buffett Indicator as a reason why investors should be cautious on stocks.

    In a conversation with Business Insider this week, fund manager Chris Bloomstran of Semper Augustus said that while the Buffett Indicator is somewhat of a flawed tool, it is worth paying attention to as an investor.

    “I think there is utility to it, and that it’s most likely a mean reverting series, and there is validity to that,” Bloomstran said.

    However, investors need to apply an “upward trend channel” to the indicator to account for the changes in today’s economy compared to the economy in previous eras.

    The US economy is structurally different now than even a few decades ago, with materially higher corporate profit margins, more asset-light businesses via the technology sector, a more globalized economy, and significantly different levels of interest rates and inflation.

    “So if profits are higher, profit margins are higher, naturally the price you pay for profits, the P/E multiple, if you hold P/Es constant, you’re applying it against the higher profit margins, so that’s going to drive up your market cap relative to GDP,” Bloomstran explained.

    “You can’t say, compare today’s market to 2000 compared to 1929 because these metrics were so different at these different intervals,” Bloomstran added.

    But despite the Buffett Indicator’s flaws, it is flashing a big warning signal for stock market investors at current levels, according to Bloomstran.

    “I think it’s screaming the cap-weighted stock market, the Wilshire 5000 [and] the S&P 500, is incredibly dangerous today. I think if you own the S&P 500 in a cap-weighted setting, you’re in for trouble,” Bloomstran said. “It’s absolutely flashing a secular peak.”

    Read the original article on Business Insider



    Source link

    Share. Facebook Twitter Pinterest LinkedIn Tumblr Email

    Related Posts

    Dow jumps 580 points, S&P 500, Nasdaq have best day since May as Wall Street bounces back

    Stock Market

    Here Are The 5 Best Performing Blue-Chip Stocks Of 2025 So Far

    Stock Market

    Dow, S&P 500, Nasdaq climb in bounce back from Friday sell-off

    Stock Market

    How Technology Is Revolutionizing Affiliate Marketing in 2025

    Stock Market

    3 hot dividend stocks I’m considering for a Stocks and Shares ISA!

    Stock Market

    Indian stock market: Nifty 50 snaps losing streak, tops 24,600. Can it reach 25k level again?

    Stock Market
    Leave A Reply Cancel Reply

    Top Picks
    Commodities

    UF/IFAS Conducting a Survey of Agricultural Losses Due to Hurricane Debby

    Fintech

    La fintech devient le second pilier de Hypothekarbank Lenzburg

    Precious Metal

    Horizon to become Australia’s newest gold producer 

    Editors Picks

    trois questions sur ce métal lourd présent dans nos assiettes et dangereux pour la santé

    January 27, 2025

    The Most Promising Cryptocurrency Investment for 2025 That Could Deliver Huge Profits

    February 14, 2025

    Wall Street’s Most Accurate Analysts Weigh In On 3 Financial Stocks With Over 15% Dividend Yields – Ellington Credit (NYSE:EARN), MFA Finl (NYSE:MFA)

    June 17, 2025

    While digital currency initiatives expand, what’s the future of cash?

    May 16, 2025
    What's Hot

    Ero Copper rétrogradée à « performance sectorielle » par la Banque Nationale du Canada

    July 9, 2025

    UK tourism to Spain ‘to collapse’ as new scheme ‘adds fifth to price’ | Europe | Travel

    July 2, 2025

    Apple plans to expand its investment in China, says CEO Tim Cook

    October 23, 2024
    Our Picks

    UK house prices fall in April as stamp duty taxes rise, data shows

    April 30, 2025

    San Far Property Limited annonce un dividende en espèces pour l’année 2024

    April 15, 2025

    bne IntelliNews – Kazakhstan’s big league fintech Kaspi acquires 65% of Turkish Nasdaq peer Hepsiburada for $1.1bn

    October 19, 2024
    Weekly Top

    This Tweet By Trump’s Energy Department About Going Back To Coal Is Getting Torn Apart For Being “Delusional”

    August 4, 2025

    Dow jumps 580 points, S&P 500, Nasdaq have best day since May as Wall Street bounces back

    August 4, 2025

    Congress’s “One Big Beautiful Bill” Will Shrink Renewable Energy Investments—Yet Some Technologies Are Preserved

    August 4, 2025
    Editor's Pick

    Shanghai unveils plan to transform suburbs through unmanned farms with drone-grown crops

    August 14, 2024

    UAP metal fragment not alien in origin, AARO says

    July 12, 2024

    New cryptocurrency scam uses Finance Adviser Salehuddin’s image, fake newspaper site to lure victims

    February 26, 2025
    © 2025 Invest Intellect
    • Contact us
    • Privacy Policy
    • Terms and Conditions

    Type above and press Enter to search. Press Esc to cancel.