The Warren Buffett indicator — which measures the stock market’s total value against the US economy’s GDP — topped 200% this week.
It’s the first time that the valuation gauge has reached these levels since 2021, the only other instance when it’s risen that high. At the height of the dot-com bubble in 2000, the measure reached 150%.
The indicator at these levels could imply that stock prices are overheated relative to economic fundamentals, as investors factor in substantial earnings upside in the coming years that may or may not materialize.
Buffett, the legendary investor and CEO of Berkshire Hathaway, once told Fortune that the metric is “probably the best single measure of where valuations stand at any given moment.” He also said that “when it gets above 100% — and especially when it gets to 200% — you are playing with fire.”
The indicator’s record high is a sign of the unbridled bullishness for AI that’s driven the market to dizzying heights in recent years. Markets have largely pushed past fears about the broader economy and have pinned hopes on an AI-driven productivity boom that will mirror the industrial revolution or the dawn of the internet.
Buffett’s valuation gauge echoes other measures in highlighting market excess. For example, the Shiller CAPE ratio is now at its third-highest level ever, behind only 2021 and 1999, and 19 out of 20 valuation measures that Bank of America tracks — including price-to-book and the forward PE ratio — are historically elevated. Federal Reserve Chair Jerome Powell last week called the market “fairly highly valued.”
Other famed investors are taking notice of the froth.
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In an appearance on CNBC on Wednesday, Leon Cooperman, the founder of Omega Advisors, invoked Buffett, reading a quote that the Berkshire CEO gave to Fortune in 1999.
“Once a bull market gets underway, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits but simply to the fact that it seems a mistake to be out of stocks,” the quote reads.
“It’s what’s going on now,” Cooperman added.