Investors beware: Warren Buffett indicator warns that the market is very expensive, is a correction imminent?

The Warren Buffett indicator indicates that the market is very expensive and this has investors on alert. It is worth noting that this measurement dates back to 2001 and arises from a conclusion reached by the legendary investor based on data from the real economy and finances.

Specifically, Warren Buffett said that the relationship between stock market capitalization and gross domestic product (GDP) It is the best way to know if the market is expensive or cheap, if it is undervalued or overvalued.

Therefore, what this indicator does is take the market capitalization of all publicly traded U.S. stocks and divide it by the latest quarterly U.S. gross domestic product figure.

The results are simple: if the figure is less than 0.7 it means that the market is undervalued, if the figure is between 0.9 and 1 it means that the market is neutral, and finally, If the figure is greater than 1.2, it means that the market is overvalued.

According to the latest measurement, the indicator is approaching an all-time high. But if we take into account other data, such as the PER of the S&P 500, we also come to the conclusion that the market is expensive.

How Wall Street performed in historical terms

The United States Stock Exchange In the last 16 years it added a profitability of 502%much larger than 104% of the world’s stock markets and 65% of the emerging markets. Experts maintain that never in history has there been a period of 15-16 years in which the North American market was so strong compared to the rest.

Over the past decade, the technology sector was the strongest, with a total return of 707% compared to 238% for the S&P 500.

This 2024, The S&P 500 rose 14.5% in the first half, the 15th best start to a year in the last 96 years.

But there is a small detail, If we did not include Nvidia shares, the increase would have been 11%, and if the Magnificent 7 were not taken into account, the increase would be even smaller, specifically 6%.

In the present moment, The top 10 S&P 500 stocks accounted for 77% of the index’s total gainbeing the second highest percentage in history, only behind 2007.

Source: Ambito

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