Is the US stock market overheated based on the Buffett Indicator — is it due to overvaluation or is the indicator no longer reliable?

As US stocks repeatedly hit new highs, the question of whether “valuations are too high” has once again become a market focus. The “Buffett Indicator,” often used to gauge the risk of market overheating, has recently reached new highs, sparking market concerns. However, another voice points out that this indicator has gradually lost its accuracy in an era dominated by globalization and tech giants.

What is the Buffett Indicator? Comparing it to the real economy

The so-called “Buffett Indicator” is calculated by dividing the total market capitalization of stocks by GDP, used to measure whether the stock market’s size is decoupled from the real economy.

According to Warren Buffett’s past statements, this indicator is considered relatively safe between 75% and 90%. When it exceeds 120%, it indicates overvaluation; during the peak of the 2000 internet bubble, the value was about 180%, before the 2008 financial crisis it was around 110%, and in 2021 it rose to 210%.

Recent data shows that the US stock Buffett Indicator has reached approximately 223%, continuing to surpass historical highs.

What is the market cap to M2 ratio? Comparing it to money supply

Besides the Buffett Indicator, another commonly cited metric is the ratio of total US stock market value to the US dollar M2 money supply, used to assess whether financial asset inflation is supported by money supply.

Looking back at history, this ratio hit a record high of 3.0 in 2000, about 2.1 in 2008, and around 2.8 in 2021. Currently, it has risen to about 3.06, reaching a new high again.

Crypto KOL @thcaroline2233 believes that the reason US stocks can maintain such high prices is due to a significant increase in corporate buybacks, with leading companies having stronger profit capabilities. Meanwhile, society’s overall income shows a K-shaped development:

A K-shaped development is inherently unhealthy; it leads to severe unemployment and wealth disparity. The ultimate outcome will inevitably be a return to rationality. When stock market inflation outpaces what M2 can support, any narrative becomes pale, including AI.

(The rich get richer, the poor have no way out? The US is fully immersed in a K-shaped economy)

Is the indicator distorted? “Globalization” makes the Buffett Indicator less applicable

However, another crypto KOL @0xTodd believes that market risk should not be judged solely by the Buffett Indicator: “This indicator was not designed with the impact of corporate globalization fully considered. It is more of a valuation tool than a timing tool.”

Today, major components of the US stock market, such as large tech companies, often generate over half of their revenue from overseas markets. Yet, the GDP in the denominator only accounts for the US domestic economy.

Under this structure, the long-term market cap exceeding GDP may no longer be an anomaly but rather a result of global capital and profit concentration in the US market.

(Inflation creates a false prosperity in the stock market: since the internet bubble, the US stock market measured in gold has stagnated)

Overvaluation does not necessarily mean a crash: the gap between valuation and timing

Additionally, valuation tools are not suitable as sole basis for entry or exit. Historical data shows that the Buffett Indicator broke above 120% as early as 2014. If investors had fully sold off then, they might have avoided a 10% short-term pullback but also missed out on a bull run lasting 12 years.

This has led some market participants to emphasize that macro valuation is more suitable for risk awareness and asset allocation rather than predicting market turning points.

(Profit margins shrink, can the seven major US tech giants still be bought blindly in 2026?)

It is difficult to definitively say whether US stock valuations are overheated, but small and medium households will bear the brunt

In summary, US stocks cannot be deemed overvalued based on a single metric; however, the dominance of a few high-profit, strong cash flow leading companies does suggest the arrival of a K-shaped economy, which imposes a living burden on small and medium households and businesses.

Perhaps in the future, US stocks will digest valuations through time, profit growth, or range-bound fluctuations, but the severe impact on low- and middle-income groups may be difficult to recover from.

This article, examining whether the US stock market is overheated through the Buffett Indicator, questions whether valuations are too high or if the indicator has become invalid. Originally published by Chain News ABMedia.