Stock Markets Are Doing Something They've Only Done 4 Times Since 1870 -- Should You Be Worried?

Expert investors like Warren Buffett are having trouble finding stock market bargains. Just take a look at Buffett's growing cash hoard. His holding company, Berkshire Hathaway, recently reported a $381 billion cash pile -- the most in its history.

Want to know why Buffett is growing cautious? One underrated stock market indicator explains everything.

This stock market indicator should make you nervous

You can calculate the price-to-earnings ratio for nearly every stock. This metric gives investors a great idea of how "expensive" a company's shares are. It's also possible to calculate the price-to-earnings ratio for a market index like the S&P 500 (SNPINDEX: ^GSPC). This gives you a good idea of how high or low stock markets in general are being valued.

Since 1870, the average price-to-earnings ratio for the U.S. stock market has been roughly 16. The median over that time frame is around 15. Right now, that figure is closer to 32. That's historically very expensive. There have only been four times in history that this figure crossed above 30. These occurrences happened during the dot-com bubble, the financial crisis of 2008, and the flash crash of 2020. This summer marked the fourth occurrence.

Image source: Getty Images.

Are markets headed for another crash? Not so fast. Importantly, this stock market gauge never crossed above 30 before the dot-com bubble. All four occurrences happened over the past 25 years. That's due to many causes: rising productivity, higher corporate profit margins, and the advent of new technologies like the internet and artificial intelligence. In short, stock markets have had structurally higher valuations in recent decades for good reasons.

Plus, of course, timing the market is extremely difficult to do. Veterans like Warren Buffett have long argued against the practice. But as Buffett's rising cash position proves, even experts can grow cautious. No one knows what markets will do next, but we do know one thing: Markets are historically very expensive.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.