Source: Fortune
Summary
Warren Buffett’s “Buffett Indicator” measures the total value of U.S. stocks against national income. The indicator currently stands at 227%, exceeding the 200% mark that Buffett identified as a warning sign in 2001. This suggests that the stock market is overvalued and due for a correction. Buffett’s thesis is that corporate profits cannot outpace GDP growth for long periods, and that the price/earnings ratio will trend back towards normal. This could lead to a significant drop in the stock market, similar to the declines seen in the past when the Buffett Indicator was high.
Our Reading
The numbers tell one story.
The Buffett Indicator’s current reading is 227%, a figure that’s around one-sixth higher than what Buffett identified as the “prepare-for-a-roasting zone”. Corporate profits have been growing faster than GDP, but this trend is unlikely to continue. The S&P 500’s price/earnings ratio is also high, exceeding 28. Buffett’s thesis suggests that both profits and P/Es will trend back towards normal, taking the Buffett Indicator and the S&P downwards with them. The bulls are predicting further growth, but Buffett’s warning is clear: the market will eventually swing back into balance, and when it does, all investors will feel the pain. The Buffett Indicator is flashing a warning sign, and investors should be nervous.
Author: Evan Null
