For decades, few valuation measures have enjoyed the mystique of the “Buffett Indicator.” The gauge, which compares the value of the U.S. stock market to the size of the American economy, was popularized by Warren Buffett, who once called it “probably the best single measure of where valuations stand at any given moment.”
Today, that measure is screaming caution. At current levels, the indicator is higher than at any point since at least 1970: firmly in “significantly overvalued” territory and signaling the potential for disappointing returns over the next year. Ordinarily, that would sound like an ominous message from the man widely regarded as the greatest investor of all time. Buffett wouldn’t buy this market. On his scale, it looks like stocks have gotten ahead of the economic fundamentals.
But there’s a twist hidden inside the warning. The same investment philosophy that made Buffett a legend also caused him to arrive relatively late to many of the most transformative industries of the modern era. Buffett famously avoided technology stocks during the internet boom because they fell outside his circle of competence. Berkshire Hathaway did not establish its enormous position in Apple until 2016, years after early shareholders had already captured life-changing gains from the iPhone revolution. He was slow to embrace cloud computing and largely sat out the rise of social media and software businesses that came to dominate the economy.
His genius did not revolve around identifying revolutions at their inception. He missed all of those opportunities. What he was good at was recognizing extraordinary businesses after their competitive advantages had become undeniable. That distinction matters because the Buffett Indicator itself reflects the same worldview. Remember, the metric assumes that stock market values should maintain a reasonably stable relationship with economic output. But today’s economy increasingly derives its value from software, intellectual property, network effects, and global platforms whose growth is far less constrained by domestic GDP. Companies such as Nvidia, Microsoft, and Alphabet generate enormous value from intangible assets and worldwide markets that scarcely existed when Buffett first championed the indicator.
Even Berkshire Hathaway itself may be beginning to acknowledge that reality. Since succeeding Buffett as CEO, Greg Abel has already shown signs of a somewhat different approach. Under Abel, Berkshire committed roughly $10 billion to help fund Alphabet’s rapidly expanding artificial intelligence infrastructure, while also dramatically increasing its stake in the Google parent company. Those moves suggest a greater willingness to participate in technological shifts that Buffett historically approached with considerable caution. Analysts increasingly expect Abel to deploy Berkshire’s capital more aggressively than his predecessor, particularly in industries being reshaped by artificial intelligence and private capital.
None of this means investors should dismiss valuation concerns. History is littered with periods when excessive optimism eventually gave way to painful corrections. But history also suggests that traditional valuation frameworks have often struggled to appreciate disruptive businesses in their infancy. By the time companies meet the standards favored by conservative investors, early shareholders have frequently already earned extraordinary returns, which creates a fascinating paradox: an indicator named after one of the greatest investors of all time may be flashing its strongest sell signal ever at precisely the moment when Berkshire Hathaway’s new leader appears increasingly willing to deviate from some of the assumptions that made Buffett famous.
In other words, the Buffett Indicator may be warning investors that stocks are expensive but Greg Abel’s early actions suggest that Berkshire itself is becoming less certain that “expensive” automatically means “sell.” We have our recommendation of Berkshire Hathaway to back up our sense that an emerging class of “Abel Indicators” are better suited to the market we find ourselves in today. And we’ve never been shy about buying stocks Warren would never look at, then cheering when they proved him wrong.