Buffetts Metric Signals Largest Market Bubble in 100 Years

Earlier in 2024, a notable and often controversial Wall Street expert issued a warning about an impending and highly predictable inflation crisis on the horizon. By mid-year, it became clear that inflation wasn’t the only foreseeable issue, as numerous recession indicators have been evident in recent months.

One such indicator is the Buffett indicator, which compares the total market capitalization of all publicly traded companies in a country to its gross domestic product (GDP). This tool, named after the famous investor Warren Buffett, who highlighted its significance in a 2001 interview, helps assess whether stocks are generally over or undervalued.

What is concerning about the Buffett indicator is its historical pattern: it tends to surge before nearly every U.S. recession, whether major or minor. Although the valuation-to-GDP ratio isn’t at an all-time high (it was around 217% in 2020), it currently stands at 197%, which is significantly above the levels seen just before the Dot-com bubble burst and prior to the onset of the Great Recession in 2007.

Buffett indicator chart using June 2024 data. Source: Advisor Perspectives

Is a stock market crash imminent? While the Buffett indicator isn’t a definitive predictor of a crash, its current reading should give investors pause, as it exceeds the ratio generally considered to reflect an accurately priced stock market—typically up to 100%. However, this isn’t the only metric suggesting a bubble might exist.

In February, an increased concentration of gains—where the ten largest firms account for 77% of the SPX—was identified as a troubling parallel between 2024 and 1929. Additionally, many prominent analysts and experts, some of whom accurately predicted previous crises, have voiced concerns that the technology sector is in a significant bubble. Despite this, there is still debate about whether this bubble will burst, with many believing the boom might still be sustainable.