Finance

Is the S&P 500’s Surge a Bubble? Buffett Indicator Flashes a Warning

The Buffett Indicator hit 219%, signaling potential overvaluation as the S&P 500 surged, mirroring dot-com concerns.

October 21, 2025, 4:14 PM

Macro shot of computer monitor with world stock market chart in trading application. Dow Jones, S&P 500, Nasdaq 100, Russell 2000 indexes falling down. By Shutterstock.com / Pavel Bobrovskiy.

Executive Summary

The “Buffett Indicator,” comparing U.S. stock market value to GDP, reached 219% in October 2025, a level Warren Buffett previously warned indicated high risk and preceded the dot-com bubble burst.

Financial experts caution against relying solely on the Buffett Indicator, noting market evolution, global revenue streams, and the indicator’s inability to guarantee an imminent bear market or recession.

A robust long-term investing strategy, focused on fundamentally strong companies, is highlighted as the primary defense against market volatility, historically yielding positive returns despite downturns.

The Story So Far

The “Buffett Indicator,” which compares the total value of U.S. stocks to the nation’s Gross Domestic Product, was popularized by Warren Buffett as a gauge for market valuation, notably preceding the dot-com bubble burst and a subsequent bear market in 2021-2022. It is currently at a historically high 219%, a level Buffett once warned indicated “playing with fire,” prompting concerns about potential market overvaluation following a significant surge, partly attributed to the artificial intelligence boom.

Why This Matters

The U.S. stock market’s “Buffett Indicator” reaching 219% in October 2025 suggests a potential overvaluation, a level previously associated with significant market downturns like the dot-com bubble, signaling increased risk for investors. However, experts caution against relying solely on this metric, given the evolving market landscape and global revenue streams of major corporations, highlighting that a long-term investing strategy focused on fundamentally strong companies remains crucial for navigating potential volatility.

Who Thinks What?

Warren Buffett’s popularized indicator suggests the U.S. stock market, at 219% of GDP, is in an overvaluation phase and “playing with fire,” a level that historically preceded market downturns like the dot-com bubble burst.

Financial experts caution against relying solely on the Buffett Indicator, noting that the market landscape has evolved with technology growth and global revenue streams, and a high reading does not guarantee an imminent bear market or recession.

A long-term investing perspective suggests that investing in fundamentally strong companies and holding investments for several years remains a primary defense against market volatility, as prosperous periods historically outweigh downturns.

The U.S. stock market, with the S&P 500 up nearly 15% year-to-date as of October 20, 2025, may be entering an overvaluation phase, according to a metric popularized by Warren Buffett. This “Buffett Indicator,” which compares the total value of U.S. stocks to the nation’s Gross Domestic Product (GDP), stood at 219% in October 2025. This level is one that the billionaire investor once described as “playing with fire” and previously preceded the dot-com bubble burst.

The Buffett Indicator’s Warning

The S&P 500 has surged by more than 35% since its low point in April of this year, leading some experts to suggest that the market could be in a bubble, primarily fueled by the artificial intelligence (AI) boom. While no one can predict the market’s future with certainty, the Buffett Indicator offers a perspective on current valuations.

Warren Buffett first discussed this metric in a 2001 interview with Fortune Magazine, explaining how it helped him forecast the tech bubble’s pop in the late 1990s. He noted that an ideal market situation for investors is when the ratio falls between 70% to 80%, indicating buying opportunities. Conversely, he warned that a ratio approaching 200% signals a high-risk environment. The indicator peaked at approximately 193% in November 2021, just before stocks entered a bear market that extended through much of the subsequent year.

Considering the Indicator’s Accuracy

Despite the Buffett Indicator reaching a record high of 219% in October 2025, financial experts caution against relying solely on any single market metric. No indicator is perfectly accurate in all situations, and a high reading does not guarantee an imminent bear market or recession.

The stock market landscape has evolved significantly since Buffett popularized this metric nearly three decades ago, particularly with the growth of the technology industry. Company valuations have generally increased, and a higher-than-average valuation does not automatically imply overvaluation. Additionally, the indicator’s focus solely on U.S. stocks relative to U.S. GDP may not fully account for the global revenue streams of many large corporations, potentially skewing the ratio.

Long-Term Investing Perspective

While monitoring indicators like the Buffett Indicator can provide insight into market conditions, a robust long-term investing strategy remains a primary defense against market volatility. Historically, prosperous periods in the stock market tend to outweigh downturns. The average S&P 500 bear market, for instance, has typically lasted about 286 days, while the average bull market has extended for over 1,000 days.

Investing in fundamentally strong companies and holding those investments for several years can help portfolios withstand severe downturns and foster wealth accumulation over time. For example, an investment in an S&P 500 index fund in January 2000, despite navigating the dot-com bubble burst and the Great Recession, would have yielded total returns of approximately 358% over 25 years. This highlights the resilience of a long-term approach even through significant market challenges.