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James Li
James Li
Articles (1321)  | Author's Website |

Warren Buffett's Market Indicator Breaks 155%

Nasdaq sets new record as Big Tech continues rally

On Monday, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator eclipsed 155%, close to its all-time high, on the back of several Big Tech companies continuing their rally from strong June-quarter earnings.

The ratio of total market cap to gross domestic product, probably the “best” single measure of where valuations stand at a given moment according to the “Oracle of Omaha,” reached 156.3%, up 7.6% from the July 1 level of 148.7%.


Based on the current market valuation level, the predicted return of the U.S. market over the next eight years is -0.1% per year assuming that the valuation level reverts to the 20-year median. If the valuation level reverts to 130% of the 20-year median, an optimistic case, the expected market return increases to 3% per year. On the other hand, if the valuation level reverts to just 70% of the 20-year median, a pessimistic case, the expect market return declines to -4.3% per year.

U.S. indexes build on four-month winning streak driven by Big Tech

The Dow Jones Industrial Average closed at 26,664.40, up 236.08 from last Friday’s close of 26,428.32. Apple Inc. (NASDAQ:AAPL) and Microsoft Corp. (NASDAQ:MSFT) gained 2.52% and 5.62%, with the former setting a new record intraday high of $446.55 on the heels of strong revenue and earnings growth for the quarter ending June 28.


The Redmond, Washington-based software giant announced on Sunday that following a conversation between CEO Satya Nadella and President Trump, Microsoft plans to continue pursuing discussions regarding the acquisition of TikTok in the U.S., aiming to complete the discussions by Sept. 15.

Big Tech valuations can shed light on market valuations

According to the All-in-One Screener, a GuruFocus Premium feature, Big Tech companies Apple, Microsoft, Amazon.com Inc. (NASDAQ:AMZN) and Google parent Alphabet Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG) have market caps of over $1 trillion, among the most-valuable companies in the U.S. As these companies represent over 30% of the Nasdaq 100’s market cap and approximately 20% of the S&P 500’s market cap according to FactSet, the valuation of these companies can shed light on the valuation of the entire U.S. market.


GuruFocus ranks Microsoft’s valuation 1 out of 10 on several signs of overvaluation, including price-book and price-sales ratios that are near 10-year highs and underperform over 82% of global software competitors.


Apple’s valuation also ranks 1 out of 10 on the back of price valuations being close to 10-year highs and underperforming over 90% of global hardware competitors.


Disclosure: Long Apple.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website

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Bruce Bohannon
Bruce Bohannon premium member - 1 month ago

There is a storm coming....

James Li
James Li premium member - 1 month ago
It does seem that a "storm" is coming.

Based on the updated value for U.S. gross domestic product, the new values for Warren Buffett (Trades, Portfolio)'s favorite market indicator are as follows:

Current: 175.1%

July 30: 172.1%

June 30: 163%

The new ratios reflect second-quarter GDP declining 32.9% on an annualized basis according to advance estimates released by the Commerce Department:


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