Warren Buffett's favourite valuation indicator flashes buy signal
[NEW YORK] A key valuation metric touted by legendary investor Warren Buffett is signalling that equities are relatively cheap, bolstering the case that the sizzling rebound in US stocks has room to run.
The 'Buffett Indicator' measures the ratio of the total value of the US stock market via the Wilshire 5000 Index divided by the dollar value of US gross domestic product. It stands at its lowest level since early September – even after a bounce that has sent stocks screaming higher in recent weeks.
The 94-year-old chief executive of Berkshire Hathaway, which will hold its annual meeting in Omaha, Nebraska, this weekend, has said the 'single best measure of where valuations stand' was the ratio of the value of US publicly traded companies to the country's GDP. The indicator blared a warning late last year when it shot to a historic high, echoing similar signals sent during market peaks in 2021 and before the bursting of the dot-com bubble in 2000.
The measure is now at 180 per cent, around where it stood after an unwind of the Japanese yen carry trade sparked a brief but intense selloff last year. That stock-market rout cleared the path for a powerful S&P 500 Index rally in the closing months of 2024.
'This is a crucial indicator because it helps traders know when to deploy capital and buy stocks,' said Adam Sarhan, founder of 50 Park Investments, who has been piling into Big Tech stocks. 'There are reasons to still be concerned about the global trade war, but if Trump isn't playing hardball with tariffs, people are going to buy, buy, buy with valuations much more reasonably priced now.'
Valuation metrics of all types have taken on added significance this year, as investors try to determine if a tariff-fuelled sell-off has left stocks cheaper relative to their fundamentals. Those calculations are complicated by the S&P 500's 12 per cent bounce from its April lows, which has traders wondering whether to bet on momentum carrying the index further – or beef up hedges and place bearish bets on a trip back down. The index is still down nearly 9 per cent from its February record.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
In addition to the unpredictable twists of US President Donald Trump's trade war, investors are bracing for several more weeks of earnings season and next week's Federal Reserve meeting as potential catalysts that could determine the trajectory of stocks.
For its part, the indicator is still above levels it plumbed during past market bottoms, including the Covid-19 sell-off of early 2020, when it fell to nearly 100 per cent. Other commonly used valuation gauges tell a similar story: The S&P 500, for example, now sits at 20.6 times forward earnings, down about 8 per cent from earlier this year, though still above the 10-year average of 18.6 times.
Critics of the Buffett indicator argue that, among other things, the measure may ignore the effects of elevated interest rates. Higher borrowing costs can eat into company profits and weigh on stock prices. Some strategists also maintain that valuation is a poor tool for timing market moves, since assets can stay cheap or expensive for a long time before correcting.
That said, few investors would ignore a measured lauded by Buffett, who is famous for buying on the cheap. Traders are eagerly awaiting Berkshire's annual meeting on Saturday (May 3), in part to glean any clues on whether Buffett has dipped into the company's cash pile – last reported at a record US$321 billion – to take advantage of bargains in the market.
It may be one of the last meetings for Buffett, who told shareholders in the company's annual letter earlier this year that 'it won't be long before' a successor takes over as CEO, likely Berkshire's Greg Abel.
Buffett 'has always been a long-term investor', said Scott Colyer, CEO at Advisors Asset Management. 'It will be crucial to hear what he says about the economy and whether cheaper valuations indeed pushed him to deploy all that cash to buy stocks during the sell-off.' BLOOMBERG
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
CNA
an hour ago
- CNA
UK's M&S resumes online orders following cyberattack
LONDON :British retailer Marks & Spencer resumed taking online orders for some clothing lines on Tuesday after a 46-day hiatus following a damaging cyberattack. The 141-year old M&S, one of the best known names in British business, said on its website "select fashion ranges now available to buy online". M&S stopped taking clothing and home orders through its website and app on April 25 following problems with contactless pay and click and collect services over the Easter holiday weekend. It first disclosed it had been managing a "cyber incident" on April 22. M&S said last month it expected online disruption to continue into July and forecast the attack would cost it about 300 million pounds ($404 million) in lost operating profit in its 2025/26 financial year, though it hopes to halve the impact through insurance and cost control. The group said hackers broke into its systems by tricking employees at a third-party contractor, skirting its digital defences to launch a cyberattack. ($1 = 0.7429 pounds)
Business Times
an hour ago
- Business Times
Australia shares close at record high
(SYDNEY) Australian shares logged a record close on Tuesday (Jun 10), with banks and energy stocks leading the charge, as renewed optimism over US-China trade negotiations lifted investor confidence and fuelled a broad market rally. The S&P/ASX 200 index rose 0.8 per cent to 8,587.20 points, a closing high. The benchmark was closed on Monday for a public holiday. Trade talks between the world's two largest economies have stretched into a second day in London as officials work to ease tensions that have spiralled from tit-for-tat tariffs to rare earth curbs, posing a threat to global supply chains. Local investors are closely watching the talks, hopeful that a positive outcome would spur economic activity in Australia's largest export market, China, and brighten prospects domestically. Heavyweight financials led gains on the Sydney exchange, rising 1.1 per cent to a record peak. The country's 'Big Four' banks gained between 0.9 per cent and 1.5 per cent. 'Despite some certainty on the horizon with trade talks progressing, investors continue bolstering their portfolio with the safety of Aussie banks, which is a likely driver of the financials sector rally today,' said Grady Wulff, a market analyst at Bell Direct. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Energy stocks tracked oil prices higher to support the rally, gaining 0.9 per cent to their highest since March 5, while investors eyed US-China talks for signs of easing trade tensions and stronger fuel demand. Sector major Woodside Energy added 0.7 per cent, while smaller rival Santos gained more than 1 per cent. Separately, Uranium and lithium miners surged, with Boss Energy and Deep Yellow gaining about 2 per cent each and Pilbara Minerals and Mineral Resources both jumping over 5 per cent. Uranium stocks are still riding the momentum sparked by Meta's recent deal to power its AI operations with nuclear energy, while lithium miners rallied on rising commodity prices, Wulff said. New Zealand's benchmark S&P/NZX 50 index rose 0.2 per cent to finish at 12,564.42 points. REUTERS
Business Times
5 hours ago
- Business Times
Asia: Markets extend gains as China-US talks head into second day
[HONG KONG] Asian stocks squeezed out more gains on Tuesday as the latest round of China-US trade talks moved into a second day, with one of Donald Trump's top advisers saying he expected 'a big, strong handshake'. There is optimism the negotiations - which come after the US president spoke to Chinese counterpart Xi Jinping last week - will bring some much-needed calm to markets and ease tensions between the economic superpowers. The advances in Asian equities built on Monday's rally and followed a broadly positive day on Wall Street, where the S&P 500 edged closer to the record high touched earlier in the year. This week's meeting in London will look to smooth relations after Trump accused Beijing of violating an agreement made at a meeting of top officials last month in Geneva that ended with the two sides slashing tit-for-tat tariffs. The key issues on the agenda at the talks are expected to be exports of rare earth minerals used in a wide range of things including smartphones and electric vehicle batteries. 'In Geneva, we had agreed to lower tariffs on them, and they had agreed to release the magnets and rare earths that we need throughout the economy,' Trump's top economic adviser, Kevin Hassett, told CNBC on Monday. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up But even though Beijing was releasing some supplies, 'it was going a lot slower than some companies believed was optimal', he added. Still, he said he expected 'a big, strong handshake' at the end of the talks. 'Our expectation is that after the handshake, any export controls from the US will be eased, and the rare earths will be released in volume,' Hassett added. He also said the Trump administration might be willing to ease some recent curbs on tech exports. The president told reporters at the White House: 'We are doing well with China. China's not easy. 'I'm only getting good reports.' Tokyo led gains in Asian markets, with Hong Kong, Shanghai, Sydney, Seoul, Singapore, Taipei, Wellington and Jakarta also well up. 'The bulls will layer into risk on any rhetoric that publicly keeps the two sides at the table,' said Pepperstone's Chris Weston. 'And with the meeting spilling over to a second day, the idea of some sort of loose agreement is enough to underpin the grind higher in US equity and risk exposures more broadly.' Investors are also awaiting key US inflation data this week, which could impact the Federal Reserve's monetary policy amid warnings Trump's tariffs will refuel inflation strengthening the argument to keep interest rates on hold. However, it also faces pressure from the president to cut rates, with bank officials due to make a decision at their meeting next week. While recent jobs data has eased concerns about the US economy, analysts remain cautious. 'Tariffs are likely to remain a feature of US trade policy under President Trump,' said Matthias Scheiber and John Hockers at Allspring Global Investments. 'A strong US consumer base was helping buoy the global economy and avoid a global recession.' However, they also warned: 'The current global trade war coupled with big spending cuts by the US government and possibly higher US inflation could derail US consumer spending to the point that the global economy contracts for multiple quarters.' AFP
