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The Warren Buffett indicator is doing the rounds again. The metric is one way to measure how overvalued stocks are. It’s at record levels, suggesting a stock market crash is heading our way.
In simple terms, the Warren Buffett indicator is the market cap of all stocks in a country (usually the US) divided by the size of the economy. The higher the indicator is, as a percentage, the more overvalued stocks are compared to the underlying economy.
In the 1970s, it stood at 40% or so. In the 1980s, it stood at 50%-60%. Just before the dotcom crash, it reached a high of 140%. On 17 October 2025, it stands at 218%. Relative to the economy, US stocks are more expensive than they’ve ever been in their history. Time for panic stations?
What’s coming?
On the one hand, this time could really be different. The instigator to the recent surge, artificial intelligence, truly is groundbreaking technology. Some talking heads have predicted we’re heading for an AI-fuelled economic golden age. If developed countries start hitting 5% or more GDP growth a year then those heady valuations could be more than justified.
On the other hand, the parallels to the 2000 bubble are legion. A groundbreaking technology has been introduced, but no one has quite figured out how to make money from it yet. Buffett might be taking this view. His conglomerate, Berkshire Hathaway, has built up an unprecedented $300bn cash pile rather than do what he usually does with money – invest in companies. That suggests he’s a tad nervous at the state of the markets.
With both camps having a strong case, I think the best move is diversification. I still have most of my net worth in equities but I have rebalanced my portfolio, including a larger amount in savings that pays decently at the moment. If stocks keep rocketing? I’m well exposed. If they crash? I have cash on hard to pick up bargains.
One to consider
Investors can diversify through assets, but also within a stock portfolio too. Take a banking stock like Barclays (LSE: BARC) for instance. While the average price-to-earnings ratio of the S&P 500 is nearing the 30 mark and the FTSE 100’s is closer to 20, the Barclays P/E stands at just 9.4. In the event of a crash, that means less room for the stock to fall.
The stock pays a dividend yield of 2.24% at the moment too. If we are in for some turbulence, then the ‘cash in the pocket’ of dividends offers an income even if share prices are stagnant. Dividends are not guaranteed, of course. But the current forecasts are expecting dividend rises in each of the next two years.
Banks are hardly immune to crashes themselves. Readers might recall a somewhat notable stock market tumble 17 years ago. The banking sector struggled for years after the great recession. But, as part of a diversified portfolio, I think Barclays is a stock to consider.
