Warren Buffett's favorite market indicator surges to a record 133%, signaling global stocks are overvalued and at high risk of crashing

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Warren Buffett's favorite market indicator surges to a record 133%, signaling global stocks are overvalued and at high risk of crashing
Warren Buffett's favorite stock-market indicator is flashing red.Getty Images / Spencer Platt
  • 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.

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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.

Read more: These 5 stocks are prime candidates for an explosive AMC-style short squeeze right now, according to data from Fintel

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.

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Here's the global version of the Buffett indicator:

Warren Buffett's favorite market indicator surges to a record 133%, signaling global stocks are overvalued and at high risk of crashing
Bloomberg data
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