Wednesday , 22 May 2024

Warren Buffett’s Favorite Valuation Metric Suggests Stock Market Is OVERvalued by 15% (+2K Views)

Here’s some perspective on the potential value of the U.S. equity market using Warren Buffett’s favorite valuation metric –investing4 total stock market capitalization relative to GDP.

So says Cullen Roche ( in edited excerpts from his original article* entitled Updating Warren Buffett’s Favorite Valuation Metric.

[The following is presented by Lorimer Wilson, editor of and the FREE Market Intelligence Report newsletter (sample here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Cullen goes on to say in further edited excerpts:

There’s some natural upside bias in an indicator like this because the stock market is not the economy and, in fact, the total market cap of the U.S. equity market has tended to grow quite a bit faster than Gross National Product. Nevertheless, if we use a linear trendline we can better gauge where we are and, based on this perspective, the U.S. stock market is starting to looking a little expensive.


Automatically receive our easy-to-read articles as they get posted!
Sign up for our FREE Market Intelligence Report newsletter (sample)
Follow the munKNEEdaily posts via Twitter or Facebook
Set up an RSS feed: It’s really easy – here’s how


At a level of 1.1 (using estimated Q4 GNP) the U.S. stock market is now about 15% above trend which would put our “fair value” for the S&P at about 1520 at present (all else equal).


Obviously, this is a rather imprecise way of viewing things, but it does provide a bit of perspective on where we might be in the market cycle. Multiple expansion and paying more for less earnings appears to be the most obvious driver of the market at present.

[As Katchum says in his article**, “according to the stock valuation chart below, the stock market is now crossing the 115% ratio of total market cap against GNP which means we are crossing the border from modestly overvalued into significantly overvalued territory.

market cap to GDP ratio

If global GDP weakens next year, a drop in the stock market will not be far off.”]

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

* (Copyright © 2013 All Rights Reserved)


Related Articles:

1. Global Stock Markets At Key Resistance Lines – Will They Break Out or Crash?

1 Comment

Markets around the globe are all facing key resistance levels at the same time. Can they pull a “Great Escape” and bust through? Yes they can and if they do, it would be very bullish for equity markets around the world [and if they don’t, then watch out below!]. Read More »
2. These Indicators Suggest Stock Market Returns Are “Too Good To Be True”

Current macro conditions indicate that we are in a sweet spot for equity returns…that global growth is continuing and there is little or no tail risk in the immediate future. It’s time to get long equities…but I have this nagging feeling that these market conditions are too good to be true. If you look, there are a number of technical and fundamental clouds on the horizon. Read More »

3. Don’t Be Scared “Stockless”! There’s No Fear Anymore – Anywhere!

There’s no fear anymore – anywhere – and I’m talking about the type of fear that overwhelms investors – and, in turn, the market. The surest indication of this can be found in the following chart. Read More »

4. Stocks to Continue to Soar & Gold to Continue to Fall in 2014 – Here’s Why

Each December we publish a list of investment themes that we feel are critical to the coming year. Below are our expectations for the U.S, Japanese and European stock markets, municipal bonds and gold. Read More »

5. Relax! Take Stock Market Bubble Warnings With a Grain of Salt – Here’s Why



Bubble predictions are headline-grabbing claims that are sure to attract reader/viewership and more than a few worried individuals who will be pushed to act but, like all forecasts, these bubble warnings should be taken with a grain of salt.

6. Bookmark This Article: The Stock Market Will Crash Within 6 Months!



Until recently, I have not used the term “stock market crash”. I do not take using this term lightly. It brings with it major repercussions. I am now breaking out this phrase because of the current state of the stock market. This stock market crash will occur within the next six months from today… The markets will fall within a combined day/few days a total of at least 20%. Bookmark this article. Read More »

7. Stock Market Bubble & Coming Recession? These Charts Say Otherwise

The real value of the stock market is positively correlated, over time, with the amount of freight hauled by the nation’s trucks (in other words, the physical size of the economy has a lot to do with the real, inflation-adjusted value of the economy) and the latest numbers (see chart) strongly suggest that we are not in a stock market bubble. Read More »

8. These 2 Stock Market Metrics Make Me Feel Uneasy – What About You?

1 Comment

It’s been an amazing run in the stock market but…I start to feel a bit uneasy about things when I see all news reported as good news, because it either means the economy is getting better or more QE is coming. The fact, though, is that the market is just driving higher on what looks like sheer optimism of continued QE and little else. You can see this optimism in two indicators you’ll recognize. Read More »