Latest news with #BuffettIndicator
Yahoo
4 days ago
- Business
- Yahoo
The Buffett Indicator Is at Its Highest Level Ever. History Shows Investors Should Brace Themselves for What the Stock Market Might Do Next.
A market valuation metric popularized by Warren Buffett is at an all-time high of roughly 208%. Buffett has said that anytime this indicator approaches 200%, investors are "playing with fire." History has proven Buffett right in the past. 10 stocks we like better than S&P 500 Index › Even after Warren Buffett steps down as CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), his legacy will live on. So will an indicator that bears his name. Buffett told Fortune magazine in 2001 that this metric, now known as the Buffett indicator, is "probably the best single measure of where valuations stand at any given moment." And now the Buffett indicator is at the highest level ever, sending a warning. The Buffett indicator is the ratio of the total market cap of all U.S. stocks to U.S. gross domestic product (GDP). When Buffett first talked about this ratio in 1999, he used gross national product (GNP), which measures the total value of goods and services produced by a country's residents both inside and outside the country. GDP is more widely used than GNP as a measure of the U.S. economy and has replaced GNP in calculating the Buffett indicator. In a sense, the Buffett indicator is similar to the most widely used stock valuation metric -- the price-to-earnings ratio. Instead of the share price of a single stock, the total market cap of all U.S. stocks is used. Instead of the earnings generated by a single company, the metric uses the total value generated by everyone in the U.S. With the Buffett indicator and the price-to-earnings ratio, a lower number reflects a more attractive valuation. Buffett hinted at an ideal range for his namesake metric in the 2001 Fortune article, saying, "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you." As you might have guessed, the Buffett indicator isn't anywhere close to the 70% to 80% range right now. It's slightly over 208% -- the highest level the indicator has ever reached. If you want to know why Buffett isn't buying many stocks these days, the Buffett indicator probably explains it. He noted in 2001, "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire." Today, the indicator isn't just approaching 200%; it has risen above that dangerous threshold. Buffett's concern about a high market valuation as measured by the Buffett indicator has been justified by history. He mentioned the indicator spiking in 1999 and 2000, reaching what was then an all-time high. Many investors remember what happened soon afterward. The dot-com bubble burst, with the S&P 500 (SNPINDEX: ^GSPC) plunging nearly 50% below its previous peak by late 2002. The Buffett indicator again came close to hitting 200% in November 2021. Within a matter of weeks, the S&P 500 began to sink and eventually fell as much as 25%. These historical precedents aren't encouraging for investors. However, the Buffett indicator isn't great at predicting short-term stock market moves. For example, the indicator has been above its level in early 2000 (right before the dot-com bubble burst) for most of the period since 2018. During this time, the S&P 500 has soared more than 130%, albeit with significant volatility. However, there's no getting around the fact that U.S. stocks are historically expensive. The Buffett indicator isn't the only metric that reflects this. The S&P 500 Shiller CAPE ratio, popularized by Yale economics professor Robert Shiller, is near its third-highest level ever. Stock valuations don't tend to remain above historic levels for too long. Sooner or later, they will return to a more normal range. With the Buffett indicator at an all-time high, investors probably should brace themselves for what the stock market might do over the near term and almost certainly will do eventually -- revert to the mean. Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $695,481!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $969,935!* Now, it's worth noting Stock Advisor's total average return is 1,053% — a market-crushing outperformance compared to 179% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of July 7, 2025 Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy. The Buffett Indicator Is at Its Highest Level Ever. History Shows Investors Should Brace Themselves for What the Stock Market Might Do Next. was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Globe and Mail
4 days ago
- Business
- Globe and Mail
The Buffett Indicator Is at Its Highest Level Ever. History Shows Investors Should Brace Themselves for What the Stock Market Might Do Next.
Key Points A market valuation metric popularized by Warren Buffett is at an all-time high of roughly 208%. Buffett has said that anytime this indicator approaches 200%, investors are "playing with fire." History has proven Buffett right in the past. 10 stocks we like better than S&P 500 Index › Even after Warren Buffett steps down as CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), his legacy will live on. So will an indicator that bears his name. Buffett told Fortune magazine in 2001 that this metric, now known as the Buffett indicator, is "probably the best single measure of where valuations stand at any given moment." And now the Buffett indicator is at the highest level ever, sending a warning. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More » What is the Buffett indicator? The Buffett indicator is the ratio of the total market cap of all U.S. stocks to U.S. gross domestic product (GDP). When Buffett first talked about this ratio in 1999, he used gross national product (GNP), which measures the total value of goods and services produced by a country's residents both inside and outside the country. GDP is more widely used than GNP as a measure of the U.S. economy and has replaced GNP in calculating the Buffett indicator. In a sense, the Buffett indicator is similar to the most widely used stock valuation metric -- the price-to-earnings ratio. Instead of the share price of a single stock, the total market cap of all U.S. stocks is used. Instead of the earnings generated by a single company, the metric uses the total value generated by everyone in the U.S. With the Buffett indicator and the price-to-earnings ratio, a lower number reflects a more attractive valuation. Buffett hinted at an ideal range for his namesake metric in the 2001 Fortune article, saying, "If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you." History lessons As you might have guessed, the Buffett indicator isn't anywhere close to the 70% to 80% range right now. It's slightly over 208% -- the highest level the indicator has ever reached. If you want to know why Buffett isn't buying many stocks these days, the Buffett indicator probably explains it. He noted in 2001, "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire." Today, the indicator isn't just approaching 200%; it has risen above that dangerous threshold. Buffett's concern about a high market valuation as measured by the Buffett indicator has been justified by history. He mentioned the indicator spiking in 1999 and 2000, reaching what was then an all-time high. Many investors remember what happened soon afterward. The dot-com bubble burst, with the S&P 500 (SNPINDEX: ^GSPC) plunging nearly 50% below its previous peak by late 2002. ^SPX data by YCharts The Buffett indicator again came close to hitting 200% in November 2021. Within a matter of weeks, the S&P 500 began to sink and eventually fell as much as 25%. ^SPX data by YCharts Will the stock market crash again soon? These historical precedents aren't encouraging for investors. However, the Buffett indicator isn't great at predicting short-term stock market moves. For example, the indicator has been above its level in early 2000 (right before the dot-com bubble burst) for most of the period since 2018. During this time, the S&P 500 has soared more than 130%, albeit with significant volatility. However, there's no getting around the fact that U.S. stocks are historically expensive. The Buffett indicator isn't the only metric that reflects this. The S&P 500 Shiller CAPE ratio, popularized by Yale economics professor Robert Shiller, is near its third-highest level ever. S&P 500 Shiller CAPE Ratio data by YCharts Stock valuations don't tend to remain above historic levels for too long. Sooner or later, they will return to a more normal range. With the Buffett indicator at an all-time high, investors probably should brace themselves for what the stock market might do over the near term and almost certainly will do eventually -- revert to the mean. Should you invest $1,000 in S&P 500 Index right now? Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $695,481!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $969,935!* Now, it's worth noting Stock Advisor 's total average return is1,053% — a market-crushing outperformance compared to179%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of July 7, 2025
Yahoo
6 days ago
- Business
- Yahoo
Billionaire Warren Buffett's Favorite Valuation Tool Just Made Dubious History -- and It Couldn't Be Worse News for Wall Street
Warren Buffett's outsized investment returns at Berkshire Hathaway have made him Wall Street's most-followed money manager. Stocks are historically pricey, and the affably-named "Buffett Indicator" proves it. However, Buffett would never suggest betting against America and has positioned Berkshire's $296 billion investment portfolio and owned assets for long-term success. 10 stocks we like better than Berkshire Hathaway › For decades, billionaire Warren Buffett has been Wall Street's most-followed money manager -- and for good reason. In his six-decade stead as the CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), the appropriately named "Oracle of Omaha" has overseen a cumulative return in his company's Class A shares (BRK.A) of 5,882,492%, through the closing bell on July 3. For context, this is over 140 times greater than the total return, including dividends, of the benchmark S&P 500 (SNPINDEX: ^GSPC) over 60 years. In addition to running circles around the S&P 500 over extended periods, Buffett's willingness to share his investment experiences and the traits he looks for in businesses has endeared him to the investing community. There's a reason around 40,000 people flock to Omaha annually to hear Berkshire's CEO offer remarks about the U.S. economy, stock market, and occasionally his company's investment holdings. But the unpleasant truth for Wall Street is that Buffett's words and/or actions don't always mesh with the buy-and-hold philosophy that's become synonymous with Berkshire Hathaway's nearly $296 billion investment portfolio. Worse yet, the valuation tool Berkshire's billionaire chief once held near and dear is making dubious history. To preface any discussion on valuation, let's recognize that "value" is something of a subjective term. What one person views as expensive might be considered a bargain by another. This perspective of value is what makes the stock market a market. When most investors are valuing a publicly traded company, they tend to rely on the price-to-earnings (P/E) ratio. This traditional valuation measure divides a company's share price by its trailing-12-month earnings per share. It's a quick way to size up mature businesses, but it's not the most accurate tool during economic downturns or for growth stocks. However, the traditional P/E ratio isn't, necessarily, the go-to valuation tool for billionaire Warren Buffett. In a rare interview granted to Fortune magazine in 2001, Berkshire's billionaire chief described the market cap-to-GDP ratio as, "probably the best single measure of where valuations stand at any given moment." This measure, which has come to be known as the "Buffett Indicator," adds up the value of all publicly traded companies and divides it by U.S. gross domestic product (GDP). When back-tested 55 years to 1970, the Buffett Indicator has averaged a reading of 85%. In other words, the cumulative value of publicly traded companies has equated to 85% of U.S. GDP. But as you can see from the post above on X (formerly Twitter), the Buffett Indicator has surged to a fresh all-time high. As of the closing bell on July 2, the Buffett Indicator hit 209.53%, which is roughly a 147% premium to its 55-year average. The implication here is very simple: Stocks are exceptionally pricey. When equities are pricey, the Oracle of Omaha has demonstrated a willingness to pare down Berkshire Hathaway's exposure and/or sit on his proverbial hands until attractive deals reveal themselves. Perhaps unsurprisingly, Berkshire's consolidated quarterly cash flow statements show Buffett has been a net seller of stocks for 10 consecutive quarters (Oct. 1, 2022 – March 31, 2025), totaling an aggregate of $174.4 billion. In fact, Buffett is such a stickler for getting a good deal that he's gone cold turkey on repurchasing shares of his favorite stock (Berkshire Hathaway) for three consecutive quarters. The Buffett Indicator surging to almost 210% is terrible news for Wall Street in the sense that it signals value is becoming increasingly hard to come by. It also suggests Berkshire's brightest investment mind is going to continue to sit on his company's record-breaking cash pile of $347.7 billion (including U.S. Treasuries). Getting a perceived deal when buying a company or taking a stake in a publicly traded business is an absolute must for billionaire Warren Buffett. But this isn't the only unbendable rule he lives by. Even when stock valuations are historically unappealing, Berkshire's head honcho has no intention of ever better against Wall Street or America. In Berkshire Hathaway's 2021 annual letter to shareholders, Buffett penned: Despite some severe interruptions, our country's economic progress has been breathtaking. Our unwavering conclusion: Never bet against America. These four words, "never bet against America," signal Buffett's recognition of economic and stock market cycles, and his genius of positioning his company to take advantage of a simple numbers game. Berkshire's chief and his top investment advisors are well aware that economic recessions are normal, healthy, and inevitable. But most importantly, Buffett recognizes the nonlinearity of economic cycles. Whereas the average U.S. recession has endured for just 10 months since the end of World War II, the typical economic expansion has stuck around for approximately five years. The disproportionate nature of these cycles has allowed U.S. GDP to meaningfully expand over time. Perhaps it's no surprise that Berkshire's investment portfolio and the roughly five dozen companies that have been acquired since Buffett became CEO tend to be highly cyclical and benefit immensely from long-winded periods of economic growth. The Oracle of Omaha also realizes that this nonlinearity applies to the stock market. Even though downturns are inevitable, they usually resolve quickly. In June 2023, a data set published on X from Bespoke Investment Group showed the average S&P 500 bear market since the start of the Great Depression (September 1929) lasted only 286 calendar days, or about 9.5 months. In comparison, the typical S&P 500 bull market endured for 1,011 calendar days over this nearly 94-year-period. Wagering on high-quality companies to increase in value over time is a statistically smart move. While a historically high Buffett Indicator is nothing short of damning to Wall Street over the short-term, an eventual correction or bear market will give way to phenomenal investment opportunities -- and Buffett or his successor Greg Abel will be there to take advantage of them. Before you buy stock in Berkshire Hathaway, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Berkshire Hathaway wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $699,558!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $976,677!* Now, it's worth noting Stock Advisor's total average return is 1,060% — a market-crushing outperformance compared to 180% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 30, 2025 Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy. Billionaire Warren Buffett's Favorite Valuation Tool Just Made Dubious History -- and It Couldn't Be Worse News for Wall Street was originally published by The Motley Fool
Epoch Times
05-05-2025
- Business
- Epoch Times
What Is the Buffett Indicator?
By Charles Lewis Sizemore From Kiplinger's Personal Finance Buy low and sell high. That sounds easy, right? The problem is defining what exactly 'low' means. How do you define whether the stock market is cheap or expensive? Precisely valuing the market is exceptionally hard. It involves making guesses on several key assumptions such as interest rates or growth in earnings per share. So investors—even all-time greats like Warren Buffett—tend to fall back on 'quick and dirty' metrics. These metrics are designed to tell you whether the market is generally cheap or generally expensive. But they aren't intended to be used with surgical precision. Related Stories 4/22/2025 3/30/2025 It just so happens that the 'Oracle of Omaha' has his very own quick-and-dirty metric, the 'Buffett Indicator.' The Buffett Indicator is a broad measuring stick of whether the stock market is overvalued or undervalued relative to the size of the overall economy. Buffett famously referred to this indicator as 'probably the best single measure of where valuations stand at any given moment' in a 2001 interview with Fortune magazine. It is absolutely not a tool for short-term trading. But it can be a really solid tool for long-term allocation decisions, such as for a 401(k) plan or even in an institutional portfolio like a pension plan. What Is the Buffett Indicator? The Buffett Indicator is calculated by dividing the total market capitalization of a country's publicly traded stocks by its gross domestic product (GDP). Market cap is the total value of all outstanding shares of every publicly traded company. For example, Microsoft's (MSFT) market cap is $2.6 trillion. That's the total value of all Microsoft shares in existence. We add up every other listed company to arrive at a total market cap of a country. If we were putting the Buffett Indicator to work in the United States, we would use the Wilshire 5000 Total Market Index. The Wilshire 5000 includes far more companies than the commonly quoted S&P 500 Index or the Dow Jones Industrial Average. We would divide this comprehensive measure of nearly all publicly traded American stocks by U.S. GDP. In short, the Buffett Indicator equals total market cap divided by GDP. Its utility is based on the idea that, over time, stock values should roughly move with the economy. When this ratio is high, it suggests that the market's valuation is running ahead of the actual economic output, meaning the market is potentially overvalued. A low ratio could indicate undervaluation and possibly a good buying opportunity. It's important to note that the number in a vacuum doesn't mean much. There is no absolute level that means the market is cheap or expensive. You have to compare it over time and look for trends. Historically, the Buffett Indicator has hovered around 75 percent to 90 percent. Values above 100 percent may suggest the stock market is overvalued, although some argue that changes in interest rates, profit margins and globalization have shifted what counts as a 'normal' ratio. The Buffett Indicator has certainly trended higher over the past few decades. The Buffett Indicator in Action Research site GuruFocus calculated the traditional Buffett Indicator along with a modified Buffett Indicator that attempts to adjust for the Federal Reserve's aggressive monetary policy since the 2008 meltdown. Given that Buffett views 100 percent as a rough threshold for overvaluation, the market has spent much of the past 20 years in highly expensive territory. Of course, today we're well above that level. Even after the recent stock correction, the traditional Buffett Indicator is above 190 percent. And the Fed-adjusted Buffett Indicator is sitting at 155 percent. When Buffett endorsed it in Fortune, the ratio had soared to record highs during the dot-com bubble. The indicator fell in the early 2000s following the market crash. But it has climbed steadily in the decades since, often reaching levels well above its historical average. Takeaways From the Buffett Indicator Does the Buffett Indicator's lofty level suggest a market crash is imminent? No, and that's not how the indicator is designed to be used. It's exceptionally poor as a short-term timing tool. Had you dumped your stocks due to overvaluation in the index, you would have missed out on one of the longest and most extreme bull markets in history. But it's a useful tool for understanding where we are in the broader market cycle. You should use it as you balance your portfolio between stocks, bonds, cash, gold and other assets. If you're heavily invested in stocks right now, you might want to look at diversifying your portfolio by upping your exposure to other asset classes. And, likewise, when the indicator dips into 'cheap' territory, you might consider increasing your exposure to stocks. ©2025 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Yahoo
03-05-2025
- Business
- Yahoo
Buffett Indicator Flashes Buy as Stocks Trade Below GDP-Based Fair Value
The Buffett Indicator, a favored valuation gauge of Warren Buffett (Trades, Portfolio), is signaling that U.S. equities may be undervalued. The ratio compares the total market capitalization of the Wilshire 5000 Index to the U.S. gross domestic product and currently sits at 180%, its lowest point since September 2024. The drop follows a volatile year that included a brief but sharp sell-off triggered by a Japanese yen carry trade unwind, which set the stage for a strong S&P 500 recovery in late 2024. Even with a 12% bounce from April lows, the index remains 9% below its February high. Investors are weighing whether stocks can sustain the rebound or if global uncertaintiesincluding the continuation of Trump-era trade tensionswill prompt another correction. Upcoming earnings reports and the next Federal Reserve meeting are expected to shape near-term market direction. By another key measure, the S&P 500 is trading at 20.6 times forward earnings, down about 8% from earlier this year. That remains above the 10-year average of 18.6, indicating some premium still exists. Critics of the Buffett Indicator argue it may overstate market value by ignoring elevated interest rates, which can compress corporate earnings and reduce equity valuations. They also note that valuation tools often fail to time market moves with precision. Still, Buffett has described the indicator as the single best measure of where valuations stand, giving it continued significance among long-term investors. Track every one of Warren Buffett (Trades, Portfolio)'s stock picks. Keep informed of the latest portfolio moves from the legendary investor. This article first appeared on GuruFocus. Sign in to access your portfolio
