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James Li
James Li
Articles (287)  | Author's Website |

Warren Buffett’s Market Indicator Remains Significantly High

Guru’s holdings reach high price valuations

September 01, 2017 | About:

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. (NYSE:BRK.A)(NYSE:BRK.B) 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.

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Figure 1

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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.

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Figure 3

Individual conglomerate holdings trade at high valuations

Several of Buffett’s holdings, including Apple Inc. (NASDAQ:AAPL) and Bank of America Corp. (NYSE:BAC), 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.

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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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New feature alert: the GuruFocus Forum

GuruFocus recently launched the Value Investing Forum, a place where you can share your investing insights through one of four channels: Buffett, Investing Ideas, Books and General Discussion. We encourage all GuruFocus members to read the Forum announcement and contribute their ideas.

Disclosure: The author has no positions in the stocks mentioned.

About the author:

James Li
I am an editorial assistant and 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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