Zinger Key Points
- The Warren Buffett Indicator is at 205%.
- S&P 500 is trading 22 times higher than its forward earnings.
- Next: Access Our New, Shockingly Simple 'Alert System'
A confluence of warning signs is pointing toward a possible stock market bubble. The Warren Buffett Indicator has soared to 205%, the S&P 500’s forward price-to-earnings ratio is over 22, and veteran investor Howard Marks, who foresaw the dot-com crash, is cautioning about high valuations.
What Happened: The Warren Buffett Indicator, which compares the total stock market capitalization to GDP, uses the Wilshire 5000 index’s capitalization for the calculation.
According to Longtermtrends, this ratio has surged to approximately 205.146%, alarming levels of valuations. This metric reached around 140% before the 2000 dot-com bubble crash and 110% before the 2007 financial crisis. Its current value is much higher than the pre-crisis levels.
Similarly, Marks, the co-founder, and co-chairman of Oaktree Capital Management, who predicted the dot-com bubble 25 years ago has alerted investors about "cautionary signs" in the market in his memo, "On Bubble Watch," dated Jan. 7.
The “cautionary signs” highlighted by Marks which hint at an upcoming bubble include the market exuberance, high S&P 500 valuations, ongoing AI hype, reliance on ‘Magnificent Seven' stocks, and index investing bias.
The investors who enter the market when the valuations are high, consistently earn lower returns over the next 10 years, according to the JP Morgan Asset Management's research cited by Marks in his memo.
In the 324 months considered by JP Morgan from 1988 to 2014 when investors entered the markets at today’s valuation of 22, “they always earned ten-year returns between plus 2% and minus 2%,” the paper added.
Among other signs, Marks added that "investors clearly shouldn't be indifferent to today's market valuation."
Why It Matters: According to Berkshire Hathaway Inc. BRK BRK third-quarter filings it holds cash and equivalents worth $325 billion. While this could reflect Buffett’s concern about high market valuations, it may also indicate preparations for future acquisitions, a strategy he has publicly embraced.
Tariff tensions from the Trump administration’s policies and the Federal Reserve’s pause on rate cuts are shaping market sentiment.
Wharton finance professor Jeremy Siegel predicted that the stock market’s performance depends on the duration of the tariffs. “As long as these tariffs are in effect and are not lowered, it’s very hard to see the stock market going up," he said in a podcast.
Siegel noted that Trump's tariffs are now more significant to investors than most economic data and will likely drive stock movements until the Federal Reserve's March meeting’s data release.
Ryan Detrick, chief market strategist at Carson Research, pointed out a pattern. If the S&P 500 drops below its December low in the first quarter, the full-year return is likely negative. The index has fallen 0.2% on average in such cases.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively ended higher on Monday. SPY rose 0.68% to $604.85, and QQQ advanced 1.21% to $529.25, according to Benzinga Pro data. In premarket on Tuesday, SPY was down 0.28% and QQQ fell 0.45%.
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