MW What Warren Buffett really thinks about the stock market

By Mark Hulbert

A 'Buffett Indicator' for the world

Warren Buffett believes the stock market is hugely overvalued.

We know that not because of his comments in the just-released Berkshire Hathaway annual report, which were ambiguous. We instead know it because of the status of the indicator that he has said is "probably the best single measure of where valuations stand at any given moment" - the ratio of the stock market's total market capitalization to gross domestic product.

Buffett didn't mention this ratio in this annual report, which is why commentators are able to see what they want to see in what he did say.

For example, Buffett emphasized in his shareholder letter that "the great majority" of Berkshire Hathaway's $(BRK.A)$ $(BRK.B)$ money "remains in equities" - which certainly sounds long-term bullish. Yet others who've read Buffett's letter insist that he "now holds more than half of his company's net assets in cash and Treasury bills," which seems quite bearish.

See: Opinion: Warren Buffett, warning of 'scoundrels' and 'fiscal folly,' slashes his exposure to U.S. stocks

The ratio of U.S. equities' market cap to U.S. GDP, which has come to be known as the Buffett Indicator, recently set an all-time high at over 2 to 1. That's more than double the indicator's average since 1970 of 0.95. It's hard to put lipstick on this pig, and Buffett didn't try. (A phone call to Berkshire Hathaway seeking clarity about Buffett's reaction to the bearish message of his preferred indicator was not immediately returned.)

Read: Warren Buffett is waiting for a 'wild swing' to the downside for stocks, says veteran Berkshire watcher

A global Buffett Indicator

Not surprisingly, many bulls have tried to dismiss the bearish message of the Buffett Indicator. One of their arguments is that U.S.-domiciled companies derive an increasingly large proportion of their revenue and earnings from foreign operations. As a result, they argue, a focus on just the U.S. will make the Buffett Indicator artificially high - and undeservedly bearish.

The historical data don't support this argument, as you can see from the accompanying chart, which plots both the U.S.-only version and the world version of the Buffett Indicator. Though the values of the two versions are different, each is well above its historical average. At the end of 2024, for example, both versions were at all-time highs. So the two versions of the indicator tell a broadly similar - and very bearish - story.

Status of other valuation indicators

Adding credence to the Buffett Indicator's message is the status of the other valuation indicators summarized each month in this space (see table below). Each was chosen because of its track record when predicting the stock market's subsequent 10-year real total return. You will notice that all of them are at or very near the extremely bearish end of their historical ranges.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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February 25, 2025 11:41 ET (16:41 GMT)

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