Buffett compares the total market capitalization of all actively traded U.S. stocks to the latest estimate of quarterly gross domestic product (GDP).
When the ratio is in the 70% to 80% range, stock purchases tend to be highly beneficial for investors. Conversely, a ratio near or exceeding 200%, similar to what was observed in the late 1990s and early 2000s, suggests a highly risky market environment.
Currently, this indicator has ascended to a two-year peak, hovering around 190%, which could herald a market downturn. Historical data supports this concern, as a previous surge to 211% in 2022 was followed by a 19% decline in the S&P 500 over the subsequent year.
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