Warren Buffett (Trades, Portfolio)’s market indicator remains near a 10-year high of 133.5% as of Sept. 1. Based on this valuation, the U.S. stock market is expected to return -1.1% per year including dividends.
Brief summary of market valuation
The Buffett Indicator, according to the Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO, is “probably the best single measure of where valuations stand at any given moment.” This ratio computes the size of the Wilshire 5000 full-cap price index relative to the U.S. gross domestic product (GDP). Figure 1 shows the trends of the Wilshire 5000 and the GDP while Figure 2 shows the trend of the Buffett Indicator for the past 10 years.
Figure 1
Figure 2
The Wilshire 5000 is currently at $25.675 trillion, approximately $7 trillion higher than the last-reported U.S. GDP. As illustrated in Figure 3, the U.S. market expects to return between -8.9% and 3.7% per year over the next eight years.
Figure 3
Individual conglomerate holdings trade at high valuations
Several of Buffett’s holdings, including Apple Inc. (AAPL, Financial) and Bank of America Corp. (BAC, Financial), trade at valuations near their 10-year highs: Apple trades near 3.89 times sales while Bank of America trades near 3.04 times sales. Figures 4.1 and 4.2 show the price-sales (P/S) valuation bands for Apple and Bank of America.
Figure 4.1: Apple Price-Sales Chart, Past 10 Years
Figure 4.2: Bank of America Price-Sales Chart, Past 10 Years
Zacks editor Ryan McQueeny mentioned in an Investorplace article that although Apple expects strong revenue potential from its new iPhones, the Cupertino, California, tech giant’s share price reached an all-time high of $162.96 Aug. 30. Apple trades near $140 per share, beating the all-time high set two days ago.
Although Bank of America trades just $24.12 per share, the share price is still near a five-year high. The Charlotte, North Carolina, bank’s stock price is also close to its 10-year maximum P/S valuation as illustrated in Figure 3.2.
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Disclosure: The author has no positions in the stocks mentioned.
