The “Buffett Indicator” is flashing red, signaling a potential market retreat on the horizon. Warren Buffett’s metric, which measures the size of the US stock market against the size of the economy, has reached a two-year high, indicating that stocks may be overvalued.
The indicator, which compares the total value of all publicly traded companies to the last quarterly estimate for gross domestic product, is currently sitting near 190%, close to the danger zone of 200%. The last time the indicator was this high was in 2022, when the S&P 500 dropped by 19% over the next year.
Investor enthusiasm over artificial intelligence stocks, like chipmakers Nvidia, has driven the market higher. Wall Street is also anticipating three interest rate cuts by the Federal Reserve, further fueling the market rally.
However, some analysts are raising concerns about a potential bubble. Legendary investor John Hussman, who predicted the 2000 and 2008 market crashes, believes that investors are in the midst of the most extreme speculative bubble in US financial history. Former Treasury Secretary Larry Summers also expressed worries about the market being at the “foothills of bubbles.”
Despite the frothy market conditions, JPMorgan Chase CEO Jamie Dimon believes that the current AI trend is real and not just hype. The settlement between Visa, Mastercard, and US merchants to lower swipe fees by $30 billion over five years is also expected to impact the market.
As the market continues to surge, analysts warn of a potential negative catalyst on the horizon, particularly in terms of earnings reports. The last trading day of the quarter is approaching, with earnings reports set to begin in early April. Investors are advised to remain cautious and monitor market developments closely.
