- Warren Buffett’s favorite market gauge is signaling that global stocks are overvalued.
- The worldwide “Buffett indicator,” which compares market cap to GDP, hit a record 133%.
- Buffett said it was a red flag when the metric soared before the dot-com bubble burst.
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Warren Buffett’s preferred market gauge climbed to a fresh high on Sunday, signaling that global stocks are heavily overpriced and could crash in the coming months.
The global version of the “Buffett indicator” hit 133% – well above its peak readings during the dot-com boom and before the financial crisis. Welt market analyst Holger Zschaepitz flagged the metric’s record level in a tweet, noting: “Buffett indicator screaming BUBBLE!”
The yardstick divides the combined market capitalization of the world’s publicly traded stocks by global GDP. A reading of more than 100% suggests the global stock market is overvalued relative to the world economy.
Buffett’s namesake indicator gained prominence after the billionaire investor and Berkshire Hathaway CEO praised it in a Fortune magazine article in 2001. He called it “probably the best single measure of where valuations stand at any given moment.”
It should have been a “very strong warning signal” when the metric skyrocketed during the dot-com bubble, he added.
However, Buffett’s beloved gauge has several shortcomings. It compares current stock valuations to past GDP figures, and its readings have been artificially inflated by economic shutdowns during the pandemic.
Stocks may also warrant a higher valuation when rock-bottom interest rates and depressed yields have left investors with fewer places to earn a return on their money, and if technology companies are poised to grow at phenomenal rates.
“Maybe this time is different in an era w/negative real yields & upcoming exponential earnings growth in the tech sector,” Zschaepitz tweeted.
The domestic US version of the Buffett indicator is also sounding the alarm on stock prices. It jumped to a record 200% earlier this year and continues to hover north of that level.