The "Buffett Indicator" signals a bullish trend! Is the U.S. stock market, after experiencing severe turbulence, facing a historic bottom-fishing opportunity?

According to the Zhitong Finance APP, a key valuation metric long praised by legendary investor Warren Buffett, known as the "Oracle of Omaha," is currently suggesting that the overall valuation of the U.S. stock market is relatively cheap. This supports the view that the strong rebound of U.S. stocks, which has been in turmoil since April due to the unprecedented global aggressive tariff policies led by the Trump administration, is likely to continue in the long term.

This key valuation metric, known as the "Buffett Indicator," measures the ratio of the total value of the U.S. stock market to the dollar value of U.S. Gross Domestic Product (GDP), and it is currently at its lowest level since early September. The indicator stands at 180%, close to the levels seen after last year's brief and severe sell-off, indicating that U.S. stock market valuations are relatively cheap. However, in comparison, this valuation metric is still higher than the general levels seen during past market bottoms, including the sell-off triggered by the COVID-19 pandemic in early 2020, when the indicator fell to nearly 100%.

The calculation of the "Buffett Indicator" is straightforward, derived by dividing the total market capitalization of the U.S. stock market, represented by the "Wilshire 5000 Index," by the dollar value of U.S. GDP. Currently, this indicator has dropped to its lowest level since early September last year, even after the rapid rebound in the stock market in recent weeks.

The 94-year-old CEO of Berkshire Hathaway, Buffett, will host the annual shareholder meeting this weekend in Omaha, Nebraska, a globally focused event also known as the "Omaha Oracle." The "Oracle of Omaha," Buffett, has repeatedly stated that the "best single indicator" for measuring stock market valuation levels is the ratio of the total market capitalization of U.S. publicly traded companies to U.S. GDP.

At the end of last year, this valuation metric soared to a historic high, sending a valuation warning to global investors, as the "Buffett Valuation Indicator" exceeded 200%—an important signal to "reduce holdings," similar to the warning signals released at the market peaks before the onset of inflation in 2021 and the bursting of the internet bubble in 2000.

Currently, this indicator is around 180%, close to the levels seen after the yen carry trade unwinding incident caused a sharp drop in U.S. stocks within a few days. That round of massive selling opened the path for a strong rebound in the S&P 500 index by the end of 2024.

"This is a very critical indicator that helps traders determine when to deploy capital and actively buy stocks," emphasized Adam Sarhan, founder of 50 Park Investments. He has recently been buying large-cap tech stocks in the U.S. stock market, such as Apple, Google, and Nvidia. "The new round of global trade wars remains concerning, but if the Trump administration no longer takes a hardline stance on tariffs and valuations are now more reasonable, people will choose to buy heavily on dips." Since the beginning of this year, the importance of various quantitative valuation indicators has significantly increased, as investors urgently need quantitative metrics to determine whether the sell-off triggered by tariffs has made stock prices relatively cheaper compared to fundamentals, thereby catalyzing the continuous upward trajectory of U.S. stocks. The benchmark for the U.S. stock market—the S&P 500 index—has rebounded 12% since hitting a temporary low in April, causing traders to hesitate on whether to continue betting on bullish momentum to push the S&P 500 higher, to gradually accumulate positions on dips during corrections, or to increase hedging sizes and bet on a market pullback. The index is still nearly 10% below the record high set in February.

In addition to the uncertainties surrounding the new round of global trade wars led by the Trump administration, investors are also preparing for the upcoming earnings season in the following weeks and next week's Federal Reserve interest rate policy meeting, both of which could determine the general trend of the U.S. stock market and even the global stock market.

Market Controversy Regarding the "Buffett Indicator"

As for the "Buffett Indicator" itself, it remains above the general levels seen at past market bottoms, such as during the sharp decline caused by the pandemic in early 2020, when it approached 100%. Other commonly used valuation indicators convey similar signals: the current forward price-to-earnings ratio of the S&P 500 is about 20.6x, down about 8% from the beginning of the year, but still above the average forward price-to-earnings ratio of around 18.6x over the past decade.

This indicator is also controversial, as critics in the market generally believe that it overlooks the overall negative impact brought by rising interest rates. Higher borrowing costs will erode U.S. corporate profits, significantly dragging down stock prices. Some strategists also point out that valuation indicators are not effective tools for timing market points and trend judgments, as assets may not undergo so-called valuation corrections due to long-term undervaluation or overvaluation.

Nevertheless, few investors choose to ignore the indicators that Buffett himself has long advocated. Traders are eagerly awaiting Saturday's Berkshire Hathaway shareholder meeting, hoping to capture more new signals—specifically, whether Buffett has utilized the company's record cash reserve of $321 billion to "pick up bargains" during the sell-off.

This may be one of the last few shareholder meetings hosted by Buffett. In his letter to shareholders earlier this year, he stated that "soon" his successor (most likely Greg Abel) will take over as CEO of Berkshire Hathaway.

Scott Collier, CEO of Advisors Asset Management, stated: "Buffett has always been a long-term investor. It will be crucial to hear how he views the overall trend of the U.S. economy and whether lower valuations prompt him to invest heavily in U.S. stocks, especially whether he will increase his long-held position in his number one holding—Apple."

A "Safe Haven"! Berkshire Hathaway, led by Buffett, Significantly Outperforms the S&P 500 Index

As this year's new round of global trade wars initiated by U.S. President Donald Trump has thrown the entire U.S. stock market into turmoil, Berkshire Hathaway, under Buffett's leadership, has demonstrated its strong safe-haven investment attributes with an unprecedented cash reserve of $334.2 billion. Especially during the sharp decline in U.S. stocks, Berkshire Hathaway's market position as a stock with strong margin of safety and consistently stable investment returns has been significantly enhanced The relatively inexpensive Class B shares of Berkshire Hathaway (BRK.B.US) had risen nearly 17% as of Thursday's U.S. stock market close this year, significantly outperforming the S&P 500 index, which has dropped nearly 5% this year. The company, led by the "Oracle of Omaha" Warren Buffett, exemplifies what it means to be a "safe haven" during periods of severe market turbulence, attracting a flood of Wall Street investment institutions into the stock. The ever-capable "Oracle" has seen numerous retail investors around the globe collectively embrace Berkshire during chaotic market times, pouring substantial funds into "recharging their faith."

This stock performance, which is much stronger than that of the S&P 500 index, highlights the overall positive trend of this large enterprise group headquartered in Omaha, Nebraska, led by "Oracle" Buffett, which has now surpassed a market capitalization of $1 trillion. Its market value has exceeded that of Taiwan Semiconductor Manufacturing Company (TSM.US), Broadcom (AVGO.US), and Tesla (TSLA.US), ranking 8th in the global market capitalization leaderboard.

Although there is no direct evidence or Buffett's explicit statements indicating a bearish outlook on the stock market, his increasingly cautious investment strategy in recent years is evident, such as the growing cash holdings and a significant reduction in Apple (AAPL.US) positions in 2024. With an enormous cash reserve, particularly a substantial amount in short-term U.S. Treasury bonds, and a drastically reduced risk exposure after cutting back on Apple, Buffett has effectively avoided the downward trajectory of U.S. stocks since late February. Moreover, the substantial gains from the recent rise in short-term U.S. Treasury bonds, due to the bond price spread and interest, may rival the investment returns from Buffett's stock portfolio this year