A 60-Year Rarity: The Buffett Indicator Flashing Red at 230% — And History Shows the Market Rarely Ignores It

The Warning Signal We Can’t Ignore

The Buffett Indicator just hit 230% — an all-time high that puts it two standard deviations above its long-term average. In 60 years of data, this extreme reading has occurred only three times before. And every single time, the S&P 500 suffered a decline of at least 25%.

If you’re wondering what that means: the stock market has grown so large relative to the U.S. economy that it’s now sitting at levels rarely seen since the late 1960s.

What Is the Buffett Indicator, and Why Should You Care?

Warren Buffett himself called it “probably the best single measure of where valuations stand at any given moment.” It’s elegantly simple — the ratio compares the total market capitalization of all U.S. stocks to the nation’s GDP. Think of it as asking: how outsized is the stock market compared to the actual economy supporting it?

For most of modern financial history, this ratio stayed comfortably between 40% and 100%. Then came the late 1990s tech boom, which pushed it above 100% for the first time. From there, the trend has been unmistakably upward. Today’s 230% reading isn’t just high — it’s unprecedented.

The Three Times History Repeated This Pattern — And What Came Next

1968-1970: The Stagflation Prelude

The S&P 500 was setting new all-time highs in 1968 when the indicator flashed this same extreme signal. What followed wasn’t pretty. By 1970, the index had fallen over 30%. The decline continued into the mid-1970s, bottoming out with a peak-to-trough loss approaching 50% as stagflation took hold.

2000: The Tech Bubble Burst

This is the textbook case of market excess. After peaking in March 2000, the S&P 500 dropped roughly 40% through the October 2002 lows. Notably, the price-to-earnings ratio at that 2000 peak was just over 30 — almost exactly where it trades today. The Nasdaq, of course, suffered an even deeper catastrophe.

2021-2022: When Stimulus Collided With Reality

Following the 2020 COVID crash, zero interest rates and massive fiscal stimulus sent stock prices soaring. By 2021, the economy was overheating. Inflation jumped to 9%, and reality set in. The S&P 500 retreated roughly 25% during the latter half of 2022 as the Fed tightened policy.

Today’s Market: Different Context, Same Risk Profile

Current valuations are undeniably stretched. The S&P 500 trades at around 31 times earnings — a rarity outside of bubble periods. The Shiller CAPE ratio, which smooths out earnings over a decade to account for business cycles, recently hit 40. The last time it reached that level? The height of the tech bubble 150 years of data ago.

Yet today’s environment isn’t purely speculative. Unlike 2000, companies actually have earnings growth supporting some of these valuations. That said, the pattern is clear: every prior occurrence of the Buffett Indicator reaching these extremes preceded market declines of at least 25%.

The Real Message: Expect Volatility and Below-Average Returns

This isn’t necessarily a prediction of an imminent crash. Macroeconomic fundamentals still show some supporting factors for equities. But the historical precedent is impossible to ignore.

What investors should prepare for:

• Forward returns are likely to be significantly below historical averages over the next several years
• Volatility will likely emerge at multiple points along the way
• A meaningful market correction is probably in the cards, even if a full bear market isn’t immediate

The Buffett Indicator doesn’t time the market. It doesn’t predict the exact moment a pullback begins. But when it reaches this level — this rare, two-standard-deviation extreme — history whispers a consistent message: caution is warranted.

Valuations still matter. And at 230%, they’re screaming that investors should remember this fundamental truth.