Stock market levels exceed those of the dot-com bubble and the Great Financial Crisis

Few investors have extensive market experience Berkshire Hathaway (NYSE:BRK) CEO Warren BuffettBuffett has been through a number of prolonged bull markets, and after the dot-com bubble burst in 2000, he noted that comparing market capitalization to gross domestic product was the best gauge of whether stocks were over- or undervalued at current prices.

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Is there going to be a problem? Dubbed the “Warren Buffett Indicator,” the index is calculated by looking at the ratio of the total market index compared to the U.S. GDP, which is tracked by the Wilshire 5000, a market-capitalization weighted index that tracks all publicly traded U.S. companies over 3,000 companies.

Numbers: Today, the Wilshire 5000’s ratio to GDP is around 195%, according to Barchart, higher than it was before the dot-com bubble burst and the 2007-2008 financial crisis. In 2000, when internet stocks like Pets.com reached all-time highs of speculation, the Buffett Index was around 140%. In 2007, before the subprime mortgage crisis that wreaked havoc on the economy for years, the ratio was around 110%.

trend: The city was the clear winner in Zillow’s 2024 home price forecasts. This is not surprising, as the number of billionaires has increased by 75% in the past decade.

So: In today’s market, rising interest rates have done little to dampen the valuations of big technology companies. Tesla (NASDAQ:TSLA) or NVIDIA (NASDAQ:NVDA) are both trading above forward price-to-earnings multiples of 50, well above the historical average for S&P 500 companies, according to macro trends.

However, revenue growth forecasts remain strong, suggesting that while the company may seem overvalued at present, the multiple could become realistic as revenue continues to grow. Ryan Detrick The chief market strategist at Carson Group recently published a chart on X that shows a steady increase in future earnings expectations over the past few years, which may help explain why investors are willing to pay a high premium for the stock at its current price.

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Will the “Buffett Indicator” predict a new market crash due to high valuations relative to current GDP figures? That depends on whether earnings continue to grow, GDP rises, and the Wilshire 5000 to GDP ratio moves closer to its historical average.

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The article “Warren Buffett Indicator” Sounds the Alarm: Stock Market Levels Exceed Dot-Com Bubble and Great Financial Crisis” originally appeared on Benzinga.com.