Buffett Indicator Flashes Buy as Stocks Trade Below GDP-Based Fair Value

The Buffett Indicator, a favored valuation gauge of Warren Buffett ( Trades , Portfolio ), is signaling that U.S. equities may be undervalued. The ratio compares the total market capitalization of the Wilshire 5000 Index to the U.S. gross domestic product and currently sits at 180%, its lowest point since September 2024.

The drop follows a volatile year that included a brief but sharp sell-off triggered by a Japanese yen carry trade unwind, which set the stage for a strong S&P 500 recovery in late 2024. Even with a 12% bounce from April lows, the index remains 9% below its February high.

Investors are weighing whether stocks can sustain the rebound or if global uncertaintiesincluding the continuation of Trump-era trade tensionswill prompt another correction. Upcoming earnings reports and the next Federal Reserve meeting are expected to shape near-term market direction.

By another key measure, the S&P 500 is trading at 20.6 times forward earnings, down about 8% from earlier this year. That remains above the 10-year average of 18.6, indicating some premium still exists.

Critics of the Buffett Indicator argue it may overstate market value by ignoring elevated interest rates, which can compress corporate earnings and reduce equity valuations. They also note that valuation tools often fail to time market moves with precision.

Still, Buffett has described the indicator as the single best measure of where valuations stand, giving it continued significance among long-term investors.

This article first appeared on GuruFocus .