U.S.-listed stock value 217% of GNP…Overvalued compared to the dot-com bubble

'Buffett indicator' hits an all-time high

Buffett "It is desirable to buy stocks when this ratio is at the 70%,80% level"

The "Buffett indicator," which Warren Buffett once used as a yardstick for valuing the U.S. stock market, has reached an all-time high, bringing renewed attention to concerns about an overheated U.S. stock market. It is estimated that the total value of U.S. listed stocks relative to the United States' Gross National Product (GNP) is currently 217%. The indicator was 150% during the 1999 and early 2000 dot-com bubble. It also far exceeds the 190% seen in the 2021 rally during the pandemic era when the U.S. ran a near-zero interest rate liquidity party.

According to CNBC on the 28th (local time), the Buffett indicator for the U.S. market — regarded as a representative measure of the overall market trend since Buffett mentioned it in 2001 — has surged to an all-time high. The Buffett indicator calculates the total value of U.S. listed stocks (the Wilshire 5000 Index) relative to the United States' Gross National Product (GNP).

In a 2001 column for Fortune, Buffett described this indicator, which compares the value of listed stocks to Gross National Product, as "the single measure that best shows valuation at any given time." Famous investors including Paul Tudor Jones have also referenced this indicator.

Buffett said at the time, "If this ratio falls to the 70% or 80% level, buying stocks is likely to be very advantageous."

During the dot-com bubble, the indicator approached 150%. Buffett warned, "If this ratio approaches 200%, as it did in parts of 1999 and 2000, it's playing with fire."

CNBC said that by this measure, today's U.S. stock market is in uncharted territory. Stock prices are rising much faster than the overall U.S. economy. This has been driven by large tech companies that have invested billions of dollars in artificial intelligence (AI) development.

Other valuation indicators are showing similar signals. According to Bespoke Investment Group, the S&P 500's price-to-sales ratio (P/S) recently rose to a record high of 3.33. It was 2.27 at the peak of the 2000 dot-com bubble, and it surged to 3.21 during the post-pandemic liquidity party.

Nevertheless, some argue that the Buffett indicator may no longer convey the same message as before. They say the U.S. economy has changed dramatically over the past 20 years, with lower asset intensity and a greater influence of technology, software, and intellectual property.

GDP and GNP may undervalue an economy based on data networks and innovation rather than physical factories. Therefore, it is argued that the higher valuation of U.S. stocks — for the world’s most productive and innovative economy — could be justified.

Buffett has not mentioned the indicator for years. However, since last year he has begun selling stocks and building a cash fortress at Berkshire Hathaway. Over the past two years, Berkshire Hathaway has accumulated $344.1 billion (about 482 trillion won) in cash and has recorded net stock sales for 11 consecutive quarters.

Kim Jeong-ah, contributing reporter kja@hankyung.com