Buffett Indicator Hits Whopping 170%: Stocks in Danger of Further Correction?
Warren Buffett is issuing a cautionary note: stocks appear to be entering a phase of overvaluation, as indicated by his preferred measure.
Back in 2001, in an article featured in Fortune magazine, Buffett firmly asserted that this particular metric holds the potential to be the most precise barometer of market valuations at any given juncture.
Buffett introduced this indicator nearly two decades ago, underscoring the significance of the ratio between the stock market's overall capitalization and the nation's gross domestic product (GDP) as the ultimate litmus test for gauging whether the market leans towards the costly or economical, overvalued or undervalued.
Put simply, it contrasts the aggregate market capitalization of publicly traded stocks against the most recent quarterly data on the United States' gross domestic product.
When this measure eclipses the 100% threshold, it raises a flag indicating that stocks are entering the realm of overvaluation. At present, this very indicator has surged notably, reaching an elevated level of 170%.
However, it's important to note that while this indicator is valuable, it's not foolproof, primarily for two reasons:
Despite S&P 500 companies surpassing quarterly earnings projections, a curious trend has emerged – the usual harmony between earnings and stock market movement seems disrupted.
A comprehensive analysis conducted by FactSet unveils that an impressive 79% of S&P 500 companies have outperformed earnings forecasts. While this statistic outshines the 10-year average, the reaction from the stock market has taken an unexpected turn.
Surprisingly, stocks that managed to surpass earnings per share (EPS) estimates experienced a decline of -0.5% on average in the subsequent
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