The Stock Market Just Did Something It's Never Done Before. Here's Warren Buffett's Dire Warning.

Key Points

• The ratio of total U.S. stock market capitalization to GDP recently hit its highest level ever.

• Warren Buffett has warned about the consequences when this ratio becomes too high.

• However, Buffett isn't panicking -- and neither should other investors.

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History often repeats itself if you wait long enough. For example, the S&P 500 (SNPINDEX: ^GSPC) recently posted positive returns of at least 1% in May, June, July, and August for only the second time in 32 years. More than 90% of the trading volume and 90% of the stocks on the New York Stock Exchange gained ground on Aug. 22, 2025. That's only happened 14 times since 1980, according to Ryan Detrick, chief market strategist at financial services company Carson Group.

Sometimes, though, stocks set entirely new ground for which there is no historical precedent. The stock market did something last week that it has never done before. And Warren Buffett has given a dire warning for investors.

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Two connected firsts

Thousands of stocks trade on U.S. stock exchanges. While the S&P 500 includes only 503 stocks (the number is more than 500 because some companies have multiple share classes), it represents roughly 80% of the entire U.S. stock market capitalization. When the S&P 500 moves higher, therefore, the overall stock market does, too.

I mention that because the S&P 500 set a record high last week. This gave investors reason to celebrate, especially after the steep sell-off experienced earlier this year caused by fears over the potential impact of President Trump's tariffs. But this achievement also led to another one that isn't as worthy of jubilation.

The ratio of total U.S. stock market capitalization to GDP reached an all-time high last week as well. It topped 217% for the first time. What does that mean? The stock market is at its highest valuation ever, at least based on this metric.

Importantly, Warren Buffett has said that this ratio is "probably the best single measure of where valuations stand at any given moment." He liked it so much that its nickname is the "Buffett indicator."

Buffett's warning to investors

To my knowledge, Buffett hasn't commented publicly about the valuation metric bearing his name hitting an all-time high last week. However, we don't have to make a wild guess about what he thinks.

In an article published by Fortune magazine in 2001, the legendary investor shared his take on the stock market meltdown in 2000 that resulted from the dot-com bubble bursting. Buffett noted that the ratio had risen to "an unprecedented level" two years earlier. He said starkly, "That should have been a very strong warning signal."

Buffett even gave benchmarks to use with his favorite valuation metric. He stated that "buying stocks is likely to work very well for you" when the indicator is in the 70% to 80% range. However, Buffett warned that if the ratio approaches 200%, investors are "playing with fire."

Why is the Buffett indicator's high level a potential warning sign for investors? When stock valuations become too expensive based on their historical levels, it's only a matter of time before they revert to the mean. For the stock market to do so at its current heights would require an especially large decline.

Four things to keep in mind

Buffett's dire warning from more than two decades ago arguably still applies today. However, I think there are four things for investors to keep in mind.

First, the Buffett indicator can remain at high levels for an extended period of time. There's no way to know for sure how long it will be before a stock market correction happens.

Second, the stock market has always risen over the long term. As some investors like to say, time in the market is more important than timing the market.

Third, Buffett isn't panicking even with the ratio of U.S. stock market capitalization to GDP at a level that he believes is a dangerous zone. While he has been a net seller of stocks for 11 consecutive quarters, he hasn't frantically dumped Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) holdings. Buffett has even bought some stocks despite the steep valuation for the overall market.

Fourth, perhaps the Buffett indicator is no longer as useful as it once was because the underlying fundamentals have changed. After all, there's a first time for everything.

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Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.