The current average is more than 3 standard deviations above its historical mean, signaling an overvalued market. Here is the same chart, this time with the geometric mean and deviations. The latest value of 163% is down from 164% in November and is more than 3SD above its historical mean.
Berkshire Hathaway's massive cash pile, coupled with the reduction in stock holdings, signals that Buffett is navigating the current market with a keen sense of caution. It's not that he has lost faith in the stock market, but rather that he believes the market is overvalued and may be due for a correction.
The CAPE ratio suggests Indian stocks are overvalued, but India's economic growth and increased foreign interest justify this to some extent. However, the CAPE ratio's limitations, including its reliance on historical data and its inability to account for changes in market composition, should be considered.
Historically, the average CAPE ratio has been around 16–17, but in recent years it has risen above 30, suggesting that the market could be overvalued by historical standards. That said, the predictive power of the CAPE ratio has diminished over the last few years.
The current Buffett Indicator value of 207.3% is 1.65 standard deviations above the trend line, indicating the market is OVERVALUED.
While U.S. stocks may seem overvalued, a deeper analysis suggests that these elevated valuations have been driven by exceptional profitability. However, the sustainability of those profit levels remains an open question.
A stock market crash can be a side effect of a major catastrophic event, economic crisis, or the collapse of a long-term speculative bubble. Reactionary public panic about a stock market crash can also be a major contributor to it, inducing panic selling that depresses prices even further.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
The answer may lie in a combination of market valuations, shifting investment priorities, and preparations for future uncertainties. While some analysts view this cash position as a drawback, others see it as a deliberate move by Buffett, staying true to his philosophy of being fearful when others are greedy.
Market Expert Ruchir Sharma says that the stock market's momentum looks likely to sputter in 2025 and that it could falter as investors grow wary of the US's mounting debt problems.
"Traditional valuation measures suggest the S&P 500 is currently more than 20% overvalued, yet trend-following measures, like momentum, remain strong."
The U.S. stock market generally did well in 2024 and may continue strong in 2025. However, we expect to see gear shifts and increased market volatility as potential policies from the incoming Trump administration combine with uncertainty about inflation and global economic strength.
A common maxim in investing is that you should aim to 'buy low and sell high'. In reality, this is usually done by buying stocks when they are undervalued and selling them when they are overvalued. This is why it is very important to know how to properly value a stock.
The Buffett Indicator forecasted an average of 83% of returns across all nations and periods, though the predictive value ranged from a low of 42% to as high as 93% depending on the specific nation. Accuracy was lower in nations with smaller stock markets.
Key Takeaways. While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.
On average, it takes around five months for a correction to bottom out, but once the market reaches that point and starts to turn positive, it recovers in around four months. Stock market crashes, however, usually take much longer to fully recover.
What are the best investments during a stock market? Some investments that may provide positive returns during a stock market crash can include safe-havens such as gold and the US dollar. Companies related to consumer staples also tend to rise in value, such as utility, food or pharmaceutical stocks.
Fair Value Estimate for Apple
With its 2-star rating, we believe Apple's stock is overvalued compared with our long-term fair value estimate of $200 per share, which implies a fiscal 2025 adjusted price/earnings multiple of 27 times, an enterprise value/sales multiple of 7 times, and a free cash flow yield of 4%.
Most expensive shares
The highest share prices on the NYSE have been those of Berkshire Hathaway class A, trading at over $625,000/share (in February 2024).
This stance hints at one thing: Buffett sees the market as significantly overvalued. Much of this cash isn't being reinvested in the stock market but rather parked in short-term U.S. Treasury bills.
Stock Ownership Is Concentrated
As of 2021, the top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.
Apple. Apple (NASDAQ: AAPL) has ranked as the largest holding in Buffett's Berkshire Hathaway portfolio for several years. The iPhone maker is still at the top early in the new year. Berkshire owns 300 million shares of Apple worth around $73.2 billion, representing 24.8% of its total holdings.