- The renowned Warren Buffett indicator, used to assess market valuation, is approaching record levels
- Market breadth signals caution on a historical scale
- Despite warned indicators, the current seasonality trend favors bullish sentiments
The Buffett indicator, introduced in 2001 by Warren Buffett, uses the ratio of stock market capitalization to GDP to determine market valuation levels.
To interpret, the ratio is calculated by dividing the total market capitalization of U.S. stocks by the latest quarterly U.S. GDP figure.
– A ratio below 0.7 indicates undervaluation.
– Ratios between 0.9 and 1.0 signify fair valuation.
– Ratios exceeding 1.2 signal overvaluation.
At present, the indicator is nearing an all-time high, reflecting potentially inflated market conditions.
This escalation aligns with elevated average P/E ratios, pointing to an overall expensive market landscape.
One contributing factor could be the consistently surpassing company earnings forecasts, sustaining bullish momentum despite high valuations.
Market Breadth Flashing Warning Signals, While Bulls Benefit from Seasonality
In 2024, the index surged 14.5% in the first semester, ranking as the 15th best performance in the past 96 years. However, stripping out individual stocks like NVIDIA would lessen this growth to 11%, with less-driving entities pulling it down to 6%.
Currently, the top decile of S&P 500 stocks accounts for 77% of the index’s collective gains, the second-highest concentration in history, trailing only the figures from 2007.
Long-term trends showcase an overstretched bull run, notably when juxtaposed against other global markets. Over just sixteen years, U.S. equities have surged by 502%, surpassing the 104% global market return and the 65% from emerging markets. This exceptional performance underscores the North American market’s unparalleled vigor.
With the tech sector wielding substantial influence, parallels to the dot-com era arise, although not exact replicas. While the S&P 500 has seen an 85% appreciation in the last five years, it pales compared to the 220% ascent during the final five years of the dot-com bubble.
Nevertheless, the prevailing seasonality favors bulls – over 96 years, a first-half surge of 10% or more has culminated in an annual average return of 24%.
Stock Exchange Performance in Current Year
Let’s review the performance of prominent stock exchanges thus far this year:
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