Is the bottom-fishing opportunity here? Buffett's favorite indicator has issued a buy signal

Data shows that a key valuation metric praised by "stock god" Warren Buffett is signaling that U.S. stocks are "relatively cheap," further supporting the view that there is still room for a strong rebound in the U.S. stock market.

Media reports indicate that this valuation tool, known as the "Buffett Indicator," measures the ratio of the total market capitalization of the U.S. stock market, represented by the Wilshire 5000 index, to the total Gross Domestic Product (GDP) of the United States. Despite a significant rise in the stock market in recent weeks, this indicator is currently at its lowest level since early September last year.

Buffett has stated that the "single best indicator" for measuring valuation levels is the ratio of the total market capitalization of U.S. listed companies to U.S. GDP. This indicator issued warnings when it soared to historical highs at the end of last year, levels similar to those at the market peak in 2021 and before the burst of the internet bubble in 2000.

Currently, this indicator is about 180%, roughly equivalent to the level during the brief but intense sell-off triggered by the unwinding of yen carry trades last year, which paved the way for a strong rebound in the S&P 500 index in the last few months of 2024.

Adam Sarhan, founder of 50 Park Investments, stated that he has recently made significant purchases of large tech stocks:

"This is a very critical indicator because it helps traders determine when to enter investments and buy stocks. Although the global trade war remains a concern, if Trump no longer takes a hardline stance on tariffs, investors will choose to 'buy, buy, buy' against the backdrop of significantly lower valuations."

In the context of significant market volatility this year, the importance of various valuation metrics has greatly increased. Investors are trying to determine whether the recent sell-off triggered by tariffs has made stock prices more attractive relative to fundamentals. However, the S&P 500 index has rebounded 12% since its low in April, putting market traders in a dilemma: whether to bet on market momentum continuing to push the index higher or to increase hedging and bet on a market pullback. Currently, the index is still down nearly 9% from its historical high set in February.

In addition to the uncertainty surrounding Trump's trade war, investors are also preparing for the upcoming earnings season and next week's Federal Reserve meeting, both of which could be key catalysts for determining market trends.

Nevertheless, this indicator remains above the levels seen during past market bottoms, such as during the sell-off at the beginning of the COVID-19 pandemic, when the indicator briefly fell to near 100%. Other commonly used valuation metrics also reflect similar trends. For example, the current expected price-to-earnings ratio for the S&P 500 is 20.6 times, which, although down about 8% from the beginning of the year, is still above the 10-year average of 18.6 times.

Critics argue that the "Buffett Indicator" has certain limitations, such as not accounting for the impact of high interest rates, as higher borrowing costs can erode corporate profits and put pressure on stock prices. Some strategists also believe that valuation is not a good tool for timing market movements, as assets can remain overvalued or undervalued for a long time without an immediate price correction. Nevertheless, few investors ignore the measuring tools advocated by Buffett, after all, he is known for "buying on the dip." Traders are eagerly anticipating Berkshire's annual meeting on Saturday, partly to see if Buffett has begun to tap into the company's previously reported record cash reserves of $321 billion to pick up bargains during the market downturn.

This shareholder meeting may be one of Buffett's last few appearances. In his letter to shareholders released earlier this year, he stated, "I will not be CEO for much longer," hinting that Berkshire may be succeeded by current Vice Chairman Greg Abel.

Scott Colyer, CEO of Advisors Asset Management, stated.

"Buffett has always been a long-term investor, and how he views the economic trends this time, and whether cheap valuations will really prompt him to use the massive cash to buy stocks, will be key."