The Buffett Indicator soars to 218%, a historical high. Is the US stock market really overheating this time?

According to the latest data obtained by Zhitong Finance APP, the valuation ratio, known as the "Buffett Indicator" of the stock market, has soared to 218%, setting a new historical record. This ratio currently far exceeds the peak of around 190% reached during the internet bubble and the bull market during the COVID-19 pandemic, marking that the market is entering an unprecedented valuation range.

This indicator measures market valuation levels by comparing the Wilshire 5000 Index (which tracks the market capitalization of all publicly traded companies in the U.S.) with the Gross National Product (GNP) of the United States.

The reason this indicator has garnered significant attention stems from Warren Buffett's evaluation in a 2001 column for Fortune magazine: "This may be the best single measure of where valuations stand at any given moment."

At that time, during the peak of the internet boom, this indicator was close to 150%. He warned investors: "If this percentage falls back to the 70% or 80% range, buying stocks is likely to yield substantial returns; but if the ratio approaches 200%—as it did during certain periods in 1999 and 2000—you are essentially 'playing with fire.'"

Now, with the indicator climbing to 218%, not only has the fire alarm sounded, but it has reached a deafening level.

Tech Giants Lead the Surge

The recent surge in the "Buffett Indicator" is primarily driven by large tech stocks. These tech giants have invested hundreds of billions of dollars in artificial intelligence (AI) projects, resulting in their market capitalizations reaching historical highs and gaining significant market recognition. Currently, the growth rate of the total market capitalization far exceeds the growth rate of the U.S. economy itself, and this phenomenon of "disconnection between market capitalization and economic growth" is precisely the core issue that the "Buffett Indicator" aims to reveal.

Other valuation tools are also signaling similar "overvaluation" warnings. According to data from investment research firm Bespoke Investment Group, the price-to-sales ratio of the S&P 500 Index has reached 3.33. For reference, during the peak of the internet bubble, this ratio was only as high as 2.27, and the post-COVID-19 market boom only pushed it to 3.21 before it fell back.

This means that the current price-to-sales ratio of the S&P 500 Index has set a new historical record. Notable investors, including Paul Tudor Jones, have often used the "Buffett Indicator" as a signal to determine whether the market is overheating, and the current value of 218% clearly exceeds any level seen in the past 20 years.

Controversy: Is the Indicator "Outdated"?

However, there are also viewpoints suggesting that the reference value of this indicator is not as relevant as it once was. Over the past 20 years, the structure of the U.S. economy has undergone significant transformation: reliance on factory production and heavy assets has decreased, while dependence on technology, software, and data networks has significantly increased.

Traditional Gross Domestic Product (GDP) and Gross National Product (GNP) statistics may not fully reflect this economic structural transformation. Therefore, some argue that in an economy increasingly driven by "intellectual property," the high level of stock market valuation is somewhat reasonable Despite such controversies, the current extreme high level of the "Buffett Indicator" cannot be ignored—especially noteworthy is that Buffett himself has not commented on this indicator for many years, but his actions are quite significant: the Berkshire Hathaway (BRK.A.US) he leads is hoarding a large amount of cash.

The company's financial report shows that cash reserves reached $344.1 billion in the second quarter of 2024, and it has been a "net seller" in the stock market for 11 consecutive quarters. Currently, Buffett is preparing to hand over the company's leadership to Greg Abel, and at this critical juncture of power transition, Berkshire still maintains a fortress-like solid balance sheet.

Whether the "Buffett Indicator" is outdated or not, the current value of 218% is hard to overlook: from the perspective of the ratio of stock market valuation to the total economy, the current U.S. market is at a historical high level