When Janet Yellen speaks, investors buy stocks (whether she tells you stock valuations are 'substantialy stretched' or not). When Warren Buffett speaks, investors listen... so when his favorite indicator is flashing a huge "sell signal" trading 80% 'expensive' to its long-term average, perhaps, as BofAML suggests, it is time to listen.
On most measures, the S&P 500’s valuation remains elevated relative to history, the exceptions being Price to Normalized EPS and P/FCF. From an asset allocation standpoint, the S&P still looks attractive vs. bonds and small-caps, but trades at an historical premium to oil and gold.
As if that was enough, BofAML further explains...
One metric used by some (including Warren Buffett) to gauge whether the stock market is overextended is the Market Cap to GDP ratio. We show this using S&P 500 market cap below...
While there are other variations...
All of which are highly correlated and illustrate similar trends. The S&P 500 market cap to GDP ratio is 1.03, over 80% above its historical average since 1964.
However, BofAML, provides a "different this time" silver lining - this metric may have limited utility:
Problems with the numerator and denominator: Market Cap/GDP is analogous to Price/Sales, with all of its shortcomings and more. Price/Sales ratios do not account for structural changes in profit margins, which has been the case for the S&P 500, chiefly due to lower taxes, lower interest expense, and higher operating margins in Tech. Meanwhile, using market value or stock price as the numerator is not consistent given that sales accrue to the entire company and not just equity stakeholders. Enterprise value is more appropriate, and is particularly important today given lower leverage ratios vs. history.
Geographic exposure differences: The S&P has increasingly derived sales and profits from overseas, and has thus become more tied to global GDP than US GDP. Comparing market cap to global GDP (since 1980), this metric trades a much lesser premium to its average – 30%, vs. 60% using US GDP over the same period.
Mix differences: Many sectors (such as Tech, Industrials and Energy) carry a much larger weight within the US equity market than they do within the US economy. US GDP is also much more services-oriented, while S&P 500 profits are more goods-oriented.
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So - no don't listen to anyone or anything apart from "buy" - when has that ever ended badly.



