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The US stock market is showing signs of an unstoppable bull run, or a potential crash. The challenge is deciding which is more likely.
If any individual stock can sum up the dilemma, it has to be Tesla (NASDAQ: TSLA). It’s been on a scary ride over the past 12 months. Along the way it’s slumped to a 52-week low of $212, and soared to a high of $488.
There’s a 2.3-fold difference between those two extremes. It’s the kind of volatility we frequently see from penny stocks here in the UK. But this is a company with a market cap of $1.4trn — nearly six times the value of the FTSE 100‘s biggest, HSBC Holdings.
Tesla currently commands a forecast price-to-earnings (P/E) multiple of 295. And whether that makes any sense depends on what we see the company as actually being.
If it’s just an electric vehicle manufacturer, valuing it that highly might seem like madness. But if it really is the future of driverless vehicles, robotics and AI, then who knows? I don’t, that’s for sure.
Stock market
How does the overall US stock market valuation shape up? Berkshire Hathaway CEO — and self-made billionaire investor — Warren Buffett has a long history of getting stock valuations right.
In 2001, in a Fortune magazine interview, Buffett spoke about the market-cap-to-GDP ratio. It compares the total value of companies on the US stock market to the nation’s gross domestic product (GDP).
He called it “probably the best single measure of where valuations stand at any given moment.” And it’s since become widely known as the Buffett Indicator.
The long-term average, going back to the 1970s, comes out at 85%. By mid-September 2025, it had soared as high as 218%. The US stock market is now valued at more than twice the country’s entire GDP.
Other measures
Some critics of the Buffett Indicator say it’s out of date, being based on GDP. The potential for US companies far exceeds this today, they say. There’s global domination at stake here, far more than ever before.
I think that argument has some merit. I’m just not sure how big a ratio it might justify. And I’ve no idea what Buffett Indicator value might be appropriate in these days of the Magnificent 7.
But then we come to the Shiller P/E Ratio. That’s the market P/E, but cyclically adjusted to cover the previous decade’s inflation-adjusted earnings. It seems like a more meaningful measure to me, getting beyond potentially misleading short-term volatility.
It hit 39.9 this month, the third-highest it’s been for 150 years. The highest was at the peak of the dotcom bubble.
What should we do?
I’m being very careful about highly-valued stocks right now. But we should always be careful when we consider buying a flying growth stock, right?
And I’m happy to keep buying established companies, paying good dividends and with the earnings and cash flow to cover them — no matter what Nasdaq tech stocks might be doing to the overall market.
But I do think investors might consider holding off on stocks like Tesla, at least until some sort of quantifiable valuation works itself out.
