Is the Stock Market in a Bubble? Here's What Warren Buffett's Own Indicator -- and His Cash Pile -- Are Telling Us.

On the surface, nearly everything looks good for the stock market these days. Both the Dow Jones Industrial Average (DJINDICES: ^DJI) and the S&P 500 (SNPINDEX: ^GSPC) are near all-time highs. Corporate earnings continue to grow. The artificial intelligence (AI) boom remains a strong tailwind.

However, many investors have a nagging question: Is the stock market in a bubble? Warren Buffett, the man whose investing prowess earned him the nickname "the Oracle of Omaha," could have an answer.

To be sure, Buffett hasn't publicly stated that he believes the stock market is in a bubble. But the valuation indicator bearing his name and his Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) cash stockpile appear to be telling us that it is.

Image source: The Motley Fool.

"Playing with fire"

Let's go back to early 2000. A frenzy over the promise of the Internet has driven the stock market to record highs. Then the dot-com bubble burst, and the S&P 500 sank more than 40% over two years. The tech-heavy Nasdaq-100 plunged more than 80% from its peak.

Buffett wasn't taken by surprise. He explained in a 2001 Fortune article that the ratio of the market caps of all publicly traded companies to U.S. gross national product (GNP) had reached "an unprecedented level" by late 1999 and early 2000. Buffett added, "That should have been a very strong warning signal."

This ratio became known as the "Buffett indicator." Gross domestic product (GDP), which measures economic output within the nation's borders, was swapped out for GNP, which measures the economic output of its citizens everywhere.

Buffett expressed his view in 2001 that if the indicator that bears his name approaches 200%, investors are "playing with fire." The valuation metric set a record high in late 2021, topping 190%. The stock market entered a bear market the following year.

Today, the Buffett indicator stands at 236%. Investors could be standing in the fire at that level if the "Oracle of Omaha" is right.

Money talks -- and a mountain of money screams.

You won't hear Buffett say much about the ratio of total stock market cap to GDP these days. However, he has never backed away from his opinion stated more than two decades ago.

What is talking, though, is the massive cash stockpile he and his successor as CEO, Greg Abel, have built for Berkshire Hathaway. The conglomerate's cash and short-term investments now total more than $397 billion -- the highest level in Berkshire's history and the largest cash position of any U.S. company ever.

BRK.B Cash and Short Term Investments (Quarterly) data by YCharts

Nearly $400 billion in cash and U.S. Treasuries scream loudly that Buffett and Abel think that most stocks are too expensive to buy. Granted, that doesn't mean that every stock is a bad choice. Berkshire has invested in a few equities so far this year.

However, Buffett recently explained to CNBC's Becky Quick, "It's tough to find values when everybody is preferring gambling." Berkshire's record cash position underscores his belief that most investors are gambling with current stock market valuations.

A stock market bubble?

If you could get Buffett to directly answer if he thinks the stock market is in a bubble right now, how would he reply? My strong hunch is that he would say that it is.

However, it's important to note that the Buffett indicator has some limitations. The metric can remain high for quite a while with stocks continuing to rise. On a similar note, Buffett and Abel have been net sellers of stocks for 14 consecutive quarters, but the stock market has delivered strong gains during that period.

The bottom line is that stock market bubbles can take longer to burst than you might think. Many people don't remember that former Federal Reserve Chairman Alan Greenspan warned about "irrational exuberance" in 1996 -- more than three years before the stock market tanked.

Are we in a stock market bubble? Quite possibly. But stocks could keep bubbling for quite a while.

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