Warren Buffett’s preferred indicator for stock market valuations is flashing a warning.
The gauge, dubbed the Buffett indicator, measures the total value of publicly traded U.S. stocks (the Wilshire 5000 index) against America’s gross national product (GNP).
The indicator is currently at an all-time high, raising fears that the market is overvalued and at unsustainable levels.
During the dotcom bubble of the late 1990s, the Buffett indicator peaked at 150%. During the 2021 pandemic rally it reached 190%. Today, the indicator is at 217%.
“If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you,” said Buffett in a 2001 speech. “If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.”
The indicator today shows that stock values are expanding far faster than the growth of the U.S. economy, driven by what many analysts say is a bubble in artificial intelligence (AI) companies.
Other stock market gauges are flashing similar warnings right now. The S&P 500's price-to-sales ratio recently climbed to 3.33, an all-time high, according to Bespoke Investment Group.
Warren Buffett, widely viewed as the most astute investor ever, hasn’t commented on the stock market indicator in years. However, his actions show he might be worried about a downturn.
Over the past two years, Buffett has been steadily moving out of stocks and into cash. His holding company, Berkshire Hathaway (BRK.A / BRK.B), has a cash hoard of $344.1 billion U.S.
Berkshire Hathaway has been a net seller of stocks for 11 consecutive quarters. Berkshire’s own more affordable Class B stock is currently trading at $500 U.S., up 11% on the year.
