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The market indicator that guides much of the investment philosophy of vaunted value investor Warren Buffett is signaling the stock market could be significantly overvalued.
One of Berkshire Hathaway chairman Warren Buffett’s favorite market metrics is flashing a warning sign.
The Buffett Indicator, which calculates the ratio of market cap of all U.S. publicly traded stocks to the country’s gross domestic product, is at the highest level in several decades, according to research from Kailash Capital Research. As of November 2024, the figure reached 230%, the highest on record, according to Kailash’s data. That type of market dynamic hasn’t been seen since March 2000 around the time the dot-com bubble burst. Back then, the market-to-GDP ratio had reached a record level of 175%.
View this interactive chart on Fortune.com
For Buffett Indicator supporters, the gauge is a useful metric in predicting when a stock market slump might happen. If company valuations exceed total GDP, it can indicate that they aren’t creating enough genuine economic value that gets recirculated in the economy. In other words, those companies are valued higher than the actual value they create.
“There has to be actual, real economic profits in order to justify valuations,” said Matthew Malgari, one of the report’s authors. “The data is unforgiving,” he and coauthor Sanjeev Bhojraj warned.
The metric is especially useful in Buffett’s eyes for gauging the current valuations of companies—are they too high, too low, or just right? If they are too high, as the Buffett Indicator would currently suggest, then investors should expect paltry returns in the stock market. Buffett outlined his views on the matter in a 1999 Fortune interview.
“You need to remember that future returns are always affected by current valuations and give some thought to what you’re getting for your money in the stock market right now,” Buffet said.
His point was that overpriced valuations, even of great companies, could still lead to slim investment returns by dint of the fact that an investor might not be buying at the optimal price.
Prior to the dot-com bubble of the mid-to-late 1990s, the market was also heavily concentrated, with the market cap of the top 50 companies at 74% of GDP. In comparison, the market cap of the top 50 stocks was 110% of U.S. GDP at the start of November 2024, according to Kailash’s data.
Over the next decade following the dot-com bubble, the stock market returned -17%, per Kailash’s calculations. For the firm, the current state of play spells similar dangers for investors. Moreover, in the current state market valuations are not just too high, but overly concentrated among America’s largest companies.
