Warren Buffett's stock market gauge hits record high... signaling bigger risks than dot-com bubble

A stock market metric named after legendary investor Warren Buffett is flashing a warning sign.  

The Buffett Indicator calculates the ratio of the market cap of all the publicly traded stocks in the US to the country's gross domestic product, or GDP. 

Experts are warning that the gauge is at a record high - and is above where it was before the dot-com bubble burst. 

This means that the market is overvalued, and could be headed for a slump.  

The figure reached 230 percent as of November 2024, according to data from Kailash Capital Research.

This type of market dynamic has not been seen since March 2000, when the market-to-GDP ratio soared to 175 percent, Fortune reported.

If the valuation of companies exceed the total GDP, it can indicate that they are not creating enough genuine economic value which is getting fed back into the economy. 

GDP is effectively the total sales in the country, and this implies companies are valued higher than the actual value they are creating.  

'There has to be actual, real economic profits in order to justify valuations,' said Matthew Malgari, one of the report's authors. 'The data is unforgiving,' he and coauthor Sanjeev Bhojraj said. 

Latest figures show GDP, which is a measure of all the goods and services produced in the US, grew 3.1 percent in the three months between July and September.

Meanwhile the US stock market gained over 20 percent in 2023 and in 2024 - a remarkable feat it has not achieved since the late 1990s.

So far this year, the S&P 500, which tracks the 500 biggest companies in the US, has reached new records amid optimism around the new presidential administration.

Many investors are positive the market, and particularly the Magnificent Seven megacap technology stocks, will continue to rally with Donald Trump's pro-growth and anti-regulation policies. 

But others are warning that these back-to-back rallies, as also happened in 1997 and 1998, could lead to a crash like the dot-com bubble bursting in the early 2000s.

JPMorgan CEO Jamie Dimon warned earlier this week that the stock market is inflated - admitting he feels more cautious than many in the business world.

In the mid-to-late 1990s the market was also heavily concentrated.

The market cap of the top 50 companies was 74 percent of GDP, according to Kailash Capital Research. 

In November 2024, meanwhile, the market cap of the top 50 stocks was 110 percent of GDP.

According to the research, this indicates that the stock market could be heading for a similar downturn. 

It suggests that not only are market valuations too high, but they are also overly concentrated among the largest companies in the US.  

According to Buffett himself, the metric is especially useful for examining the current valuations of companies - and seeing if they are overvalued or undervalued. 

'You need to remember that future returns are always affected by current valuations and give some thought to what you’re getting for your money in the stock market right now,' the 94-year-old billionaire told Fortune in 1999. 

What he meant was that overpriced valuations, even of great companies, could still lead to paltry investment returns because an investor may not be buying at the right price.

However, some experts think that the Buffett Indicator is not a perfect metric.

While it is instructive, it fails to account for the fact that many companies in the US stock market sell their goods and services abroad, BCA Research chief strategist Dhaval Joshi told Fortune. 

'The one slight flaw or problem with the measure is that if the companies in the market cap [total] are global companies, which of course they are, then it's a sort of a mismatch because you're looking at the market capitalization of global companies versus US GDP, effectively total sales in the United States,' Joshi said.