On Wednesday, CNBC published a clip from an interview with Warren Buffett where he says, “It’s tough to find values when everybody is preferring gambling.”
Mr. Buffett has long believed this market is very overvalued, which is why Berkshire has been building up record amounts of cash / cash equivalents. Specifically, Berkshire has built up an unprecedented ~$400 billion of cash and T-bills!
So, where do valuations stand, and what does it mean for an investment approach?
Let’s first look at a few of the most reliable valuation metrics:
- The “Buffett Indicator”: Market Cap / GDP
- Dr. Hussman’s proprietary valuation metric: Nonfinancial market cap / nonfinancial corporate gross-value added
- Matrix for Forward Returns
Buffett Indicator
It’s only fitting to kick this off with the Buffett Indicator. On December 10th, 2001, Warren Buffett co-authored an essay with Carol Loomis where they presented an 80-year chart showing the value of all publicly traded securities as a percentage of US gross national product (GNP).
Buffett went on to say, “Still, it is probably the best single measure of where valuations stand at any given moment.”
And ever since it’s been known as the “Buffett Indicator.” Below is a modern version of this indicator using U.S. stock market capitalization and U.S. GDP.
Dr. Hussman’s Proprietary Valuation Metric
“The current level of stock market valuations remains – easily – the most speculative extreme in U.S. financial history, beyond both the 1929 and 2000 extremes.” Dr. Hussman, July 2026
Regarding his proprietary market valuation metric, Dr. Hussman goes on to say:
“The chart below shows our most reliable gauge of market valuations in data since 1928: the ratio of nonfinancial market capitalization to gross value-added (MarketCap/GVA)….
“At its recent extreme, MarketCap/GVA pushed to a record high of 4.2. To put that level in perspective, the historical norm across a century of market cycles is only about 1.0. [1.0] is also the level that has corresponded to run-of-the-mill subsequent S&P 500 annual total returns of 10% annually, in market cycles since 1928….”
So, a ratio of 4.2 implies much lower than average returns for the next 10-12 year period.
Notice when the peaks in this chart take place… 1929, late-1960s, 2000, 2007 and think about what took place for the subsequent ten or so years after those moments in time.
There is an extreme complacency in the market and insatiable appetite for gambling. I believe the speculative attitude is firmly rooted in the fact that we haven’t had a prolonged correction in almost twenty years so investors have been so conditioned to simply buy the dip and get quickly rewarded.
The fuel for the fire has come from artificially low interest rates and easy money over the last two decades since the Great Financial Crisis and the $5 trillion money bomb the Fed dropped on the economy at the outset of COVID that helped to propel all asset prices higher (real estate, stocks, crypto, etc…).
There is an entire generation of people who have never experienced a prolonged downturn.
And the other generations alive that have experienced prolonged downturns seemed to have forgotten about them because it’s been so long. The problem is now many of those folks are near retirement age and don’t have time to make up severe losses that could result if they don’t manage risk well so they are more aggressive than they’ve ever been at basically the worst time in history and the worst phase in their life to be so aggressive.
Matrix of Forward Returns
Below is the matrix of forward annualized returns for a variety of sales growth, profit margins and PE multiple assumptions. This gives a range of returns under a variety of conditions.
As we can see, the expected returns over the next twelve years are extremely low…negative in most cases over the subsequent twelve years unless economic growth, corporate profit margins and price/earnings multiples are all bonkers and far exceed long-term historical averages. And even then stock market annualized returns could be low single digits.
For more information on the methodology of the matrix, you can find the explanation on my website here.
Let’s contrast the matrix above with the same matrix from June 2009 at the bottom of the Great Financial Crisis. This will really help to put the current market environment in perspective.
Notice how much more attractive the potential annualized returns are across the entire matrix under the same growth, margin and multiple assumptions.
When comparing these two periods of time, does it look like it’s the time to be aggressively positioned with our nest eggs or does it appear to potentially be more appropriate to take a more conservative approach for now and let valuations normalize?
What We Know and What We Don’t Know
We know the market is expensive. However, we also know that this doesn’t tell us anything about short-term returns. Valuations, historically, have only been meaningful for subsequent 10-12 year periods.
We know the risk of a deep, prolonged correction is much higher when the starting point of valuations is around current levels.
We don’t where or when the market tops out. We don’t even know if history will necessarily repeat.
We know that if we’re near desired retirement age, or early in retirement years, a significant decline in the portfolio, or a lost decade, will jeopardize our retirement goals for most folks.
This is why the roughly ten year period surrounding our retirement date is such a critical period. We still have to fund 30+ years of retirement at that point so steep declines (or lost decades early on in retirement) can permanently impact our retirement lifestyle.
What We Do About It
In short, when valuations are at extremes and especially for folks in that ten year period around their retirement date, we emphasize risk management.
What does that mean?
It means we utilize stress testing within the projections to determine our financial capacity for risk. That then drives our investment strategy and helps increase the chance that we can continue to make positive returns if markets are behaving while also limiting the likelihood our financial independence is jeopardized if / when the deep, prolonged correction (or a lost decade in the stock market) comes.
Then we gradually refocus and adjust the portfolio over time as we get deeper into retirement (i.e. less years of expenses to fund from the portfolio) and / or increase stock exposure as valuations normalize.
Disclosures and Methodology:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions.S ome data may be outdated
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
Assumes 50% in 10-year Treasury Bonds and 50% in U.S. stock market rebalanced on the last day of each year. Assumes income grows at 3% per year and save 20% of gross income. Assumes no taxes, fees or expenses on the underlying investments.
Buffett Indicator Chart
[1]Reconstructed Deep History Era (1920–1969): Because no comprehensive, all-inclusive market index existed during this period, these data points rely on academic reconstructions (primarily from the National Bureau of Economic Research and Global Financial Data). Equity market value is aggregated from major individual exchanges—principally the New York Stock Exchange (NYSE)—and measured against historical Gross National Product (GNP) and early back-calculated GDP data.[2]Broad Index Tracking Era (1970–1999): This era introduces institutional standardization following the launch of the Wilshire 5000 Full Cap Index in December 1970. The index serves as the definitive aggregate for all publicly traded U.S. headquartered equities. This capitalization data is measured directly against the standardized, quarterly U.S. Gross Domestic Product (GDP) reports provided by the Bureau of Economic Analysis (BEA).[3]Modern Era (2000–2026): This era captures the modern structural shift of the indicator, matching the total market value of all public U.S. equities against the current BEA U.S. GDP. Readings in this era are heavily influenced by corporate globalization, where the international revenue of massive mega-cap technology firms expands U.S. equity valuations without fundamentally altering domestic U.S. GDP production metrics.
