Few investors have more experience in the market than Berkshire Hathaway Inc (NYSE:BRK) (NYSE:BRK) CEO Warren Buffett, which has seen its share of overextended bull markets. After the Dot-Com Bubble crashed in 2000, Buffett noted that comparing stock market capitalization to Gross Domestic Product (GDP) is the best indicator of whether stocks are overvalued or undervalued at current prices.

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Brewing problem? The index, called the “Warren Buffett Index” is calculated by looking at the ratio of the overall market index compared to US GDP. The overall market index is tracked by the Wilshire 5000, which is a capitalization-weighted index tracking all publicly traded US companies, consisting of more than 3,000 companies.

The numbers: Currently, the Wilshire 5000 to GDP ratio is around 195% according to Bar diagram, higher than the ratio that preceded the collapse of the dot-com bubble as well as the Great Financial Crisis in 2007-2008. In 2000, when Internet stocks like Pets.com reached historically profitable levels, the Buffett Index was around 140%. In 2007, in the wake of the subprime mortgage crisis that wreaked havoc on the economy for years, the ratio was around 110%.

Trends: This city is the clear winner of Zillow’s 2024 Home Value Forecast — It’s no surprise, as the number of millionaires has increased by 75% in the past decade.

So: In today’s market, higher interest rates have done little to dampen the valuations of big tech companies like Tesla Inc (NASDAQ:TSLA) or NVIDIA Corp (NASDAQ:NVDA), each trading with forward price-to-earnings ratios above 50, well above the historical average for S&P 500 companies according to Lengths.

However, earnings growth forecasts remain strong, indicating that while the companies may look overvalued today, those multiples could come crashing down as earnings continue to rise. Ryan Detrick, head of market strategy at Carson Group, recently shared a chart on X showing that expectations of future earnings have been rising steadily in recent years, possibly helping to explain why investors are willing to pay high premiums for stocks at current prices.

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Will the ‘Buffett Index’ predict another market crash due to high valuations compared to current GDP numbers? It will depend on whether earnings continue to rise, thereby driving GDP higher and bringing the Wilshire 5000 to GDP ratio closer to its historical averages.

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this article ‘Warren Buffett Indicator’ Sounding Alarm: Stock Market Levels Now Exceed Dot-Com Bubble, Great Depression originally appeared on Benzinga.com