Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Two widely recognized market valuation indicators, the Buffett indicator and the S&P 500 Shiller CAPE ratio, are currently registering historically high levels, raising questions about the stability of the stock market. An analysis published on October 19, 2025, by Keith Speights, highlights these metrics, which have historically preceded periods of market decline and are prompting discussions about a potential downturn in 2026.
Historically High Valuation Metrics
The Buffett Indicator
The Buffett indicator, a metric popularized by investor Warren Buffett, compares total market capitalization to gross domestic product (GDP). In 2001, Buffett stated that a ratio approaching 200% suggests investors are “playing with fire.” This indicator neared 200% in 1999 and 2000, preceding the dot-com bubble’s burst. It also approached this level in late 2022, just before a significant bear market ensued.
Currently, the Buffett indicator stands at an all-time high of 219%. According to Buffett’s historical assessment, this level suggests a market operating under conditions of heightened risk.
The Shiller CAPE Ratio
Another significant valuation metric is the cyclically adjusted price-to-earnings (CAPE) ratio, co-developed by Yale economics professor Robert Shiller. This indicator averages inflation-adjusted earnings over a 10-year period to provide a smoothed view of market valuations, aiming to account for economic cycles.
The S&P 500 Shiller CAPE ratio has historically shown correlation with major market downturns, including the 1929 stock market crash, the dot-com bubble burst around 1999-2000, and the market decline in 2022. The current S&P 500 Shiller CAPE ratio is at its second-highest level ever, a historical precedent that, if followed, could signal an impending market correction.
Assessing the Risk of a Market Downturn
While these indicators suggest historically high valuations, the analysis notes that they are not flawless predictors of market meltdowns. There are few historical precedents for such extreme levels, which limits their statistical significance as forecasters. Additionally, equity markets can sustain elevated valuations for extended periods, as exemplified by the period following former Federal Reserve Chairman Alan Greenspan’s “irrational exuberance” comment in December 1996, after which the S&P 500 nearly doubled by the end of 1999.
Despite these caveats, the indicators undeniably point to valuations that are significantly higher than historical averages. Investors are advised against ignoring these signals, even if they do not guarantee an immediate market crash.
Investor Considerations Amid Elevated Valuations
In light of these elevated market valuations, the analysis suggests that investors should prepare for a potential market decline. This preparation includes focusing on acquiring stocks that are attractively valued relative to their growth prospects and building cash reserves.
Crucially, maintaining a long-term investment perspective is emphasized. Historically, stock markets have rebounded and reached new highs following all previous downturns, a pattern expected to continue after any future market corrections.
