Warren Buffett’s Favorite Indicator Signals US Stocks Might Be Overvalued
Warren Buffett, the legendary investor, has long been known for his keen eye on the stock market. One of his favorite indicators, the Buffett Indicator, is now flashing a warning signal that US stocks might be highly overvalued.
The Buffett Indicator, which measures the total market cap of US stocks relative to US GDP, hit a record high of 200% on Monday, surpassing the previous peak of 197% reached in November 2021. This means that the total market cap of US stocks, around $55 trillion, is now double the size of annualized US GDP, which is approximately $27 trillion.
In a 2001 Fortune article, Buffett warned that when the ratio approaches 200%, as it did during the dot-com bubble in 1999 and 2000, investors are “playing with fire.” The stock market experienced a painful bear market shortly after the indicator peaked in November 2021.
B. Riley strategist Paul Dietrich and fund manager Chris Bloomstran have both highlighted the unprecedented reading in the Buffett Indicator as a reason for caution in the stock market. While Bloomstran acknowledges the flaws in the indicator, he believes it is still worth paying attention to as an investor.
Despite the flaws, the Buffett Indicator is sending a clear warning signal for stock market investors at current levels. Bloomstran believes that owning the S&P 500 in a cap-weighted setting could be risky, as the indicator is “absolutely flashing a secular peak.”
As investors navigate the current market environment, it seems that Warren Buffett’s favorite indicator is once again proving to be a valuable tool in assessing the valuation of US stocks.
