Both Buffett and Barclays indicators have turned "red," indicating that the U.S. stock market has formed an unprecedented bubble!

After an astonishing 36% surge since hitting a low in April, the U.S. stock market is now facing a valuation warning indicator favored by investment guru Warren Buffett.

The latest data shows that the "Buffett Indicator" has surpassed the historical record set during the pandemic, which previously signaled the arrival of the bear market in 2022. The "Buffett Indicator" compares the total market capitalization of U.S. stocks to the Gross Domestic Product (GDP), currently indicating that the size of the U.S. stock market (approximately $72 trillion) is more than double the economic output, even as GDP grows at its fastest pace in nearly two years.

Barclays' derivatives strategist team has also warned that the current "Buffett Indicator" suggests "stocks are overvalued, echoing concerns about bubble behavior."

Meanwhile, Barclays' proprietary market euphoria indicator is also sending similar warnings. This indicator measures the proportion of euphoric stocks based on options data, currently around 11%, above the long-term average of 7.1%. This figure previously surpassed 10% during the late 1990s internet bubble and the 2021 meme stock frenzy.

Currently, strong corporate earnings are supporting the rise in stock prices, with S&P 500 companies' profits surging nearly 13% year-over-year in the third quarter, and sales growth reaching a three-year high. However, concerns about market concentration are intensifying, and strategists advise investors to remain cautious while enjoying seasonal strength.

Both Buffett and Barclays Indicators Flash Red

The "Buffett Indicator" is a practical measure for assessing whether stock valuations are too high. Buffett himself warned in 2001 that when the stock market valuation to GDP ratio reaches two times, investors are "playing with fire." Today, this indicator has reached that level.

However, Buffett emphasizes that this indicator should not be viewed in isolation.

At Berkshire Hathaway's 2017 annual meeting, he stated that "judging whether the market is overvalued or undervalued is not simply relying on one or two formulas." The historical performance of this indicator confirms this cautious approach: in May of this year, the indicator showed stocks were relatively cheap, but the market subsequently embarked on a historic six-month rally.

The market euphoria indicator launched by Barclays this year is based on options data since 1997 and aims to help investors monitor signs of excessive positioning and irrational exuberance. This indicator measures the proportion of euphoric stocks among U.S. stocks with liquid options, and its trends often correspond with the Buffett Indicator.

Barclays derivatives strategists, including Stefano Pascale, point out that while the Buffett Indicator is not perfect, it remains a useful tool for assessing whether stock valuations are excessively inflated. The current 11% proportion of euphoric stocks is close to the peak levels seen during the late 1990s internet era and the 2021 meme stock frenzy.

Strong Corporate Earnings Support High Valuations, Concerns About Market Concentration Intensify Correction Risks

Despite the warning signals from valuation indicators, corporate earnings performance has provided strong support for rising stock prices. According to Bloomberg Intelligence data, over 70% of S&P 500 companies that have reported earnings saw profits surge nearly 13% year-over-year, with sales growth reaching a three-year high.

Deutsche Bank strategists noted in a report on November 4 that the year-over-year profit growth of the median S&P 500 company is at the top of the typical range, close to the highest level in the past 15 years. More importantly, U.S. stock earnings growth is "spreading across multiple dimensions," alleviating concerns about growth being overly concentrated in a few large technology companies The market narrative has recently shifted, with new concerns about market concentration triggering anxiety over stock market corrections. Deutsche Bank strategist Jim Reid pointed out that Palantir Technologies' nearly 8% drop on Tuesday "symbolizes this shift, even though the company had just raised its revenue outlook the day before."

Reid stated that as a data analytics company, Palantir's stock price has quadrupled over the past year, "which sets an extremely high bar for any earnings report." Barclays strategists suggest that while the market is entering a seasonally strong period, investors should remain cautious, "leasing upward space remains a prudent strategy to lock in recent gains while limiting risks."