Warren Buffett's Dire Stock Market Warning That Could Be Completely Wrong

Key Points

Buffett issued an ominous prediction about the stock market years ago that is especially worrisome now. However, a case can be made that AI has changed the dynamics enough to render his prediction obsolete.These 10 stocks could mint the next wave of millionaires ›

You don't have to look very hard to determine that Warren Buffett thinks the stock market's valuation is frothy. The legendary investor has built the largest cash stockpile for Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) in the conglomerate's history. He has been a net seller of stocks for 12 consecutive quarters.

Buffett also issued a dire stock market warning more than two decades ago that seems downright scary now. But could the words be completely wrong?

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Buffett's ominous prediction

Despite Buffett earning the nickname the "Oracle of Omaha," it's usually not his style to make bold predictions. However, he did exactly that in an article published by Fortune in 2001. That article featured a chart showing historical levels for the ratio of total stock market capitalization to gross national product (GNP).

Buffett wrote that this ratio is "probably the best single measure of where valuations stand at any given moment." He noted that the metric had soared to an all-time high two years earlier, adding, "That should have been a very strong warning signal." The stock market crashed shortly after the ratio of total market capitalization to GNP peaked.

The multibillionaire didn't stop there, though. Buffett stated that if the ratio ever approaches 200% (as it did in 1999 and early 2000), investors are "playing with fire."

This valuation metric is now known as the Buffett indicator. And it's currently at a whopping 223%. Investors, meet fire -- at least, if Buffett was right.

Are things different now?

Many investors aren't paying any attention to Buffett's dire warning from 2001. The S&P 500(SNPINDEX: ^GSPC) is near its all-time high. They seem to believe what some have called the four most dangerous words in investing: "This time it's different."

Is there a case to be made that things actually are different now? I think so.

The Buffett indicator itself highlights how factors have changed since the early part of the 21st century. Gross domestic product (GDP) has replaced GNP in the valuation metric and is much more widely used by economists. The key difference between the two economic numbers is that GDP measures the total value of goods and services produced within a country by everyone (citizens and non-citizens alike), while GNP measures the value of goods and services produced by a country's citizens, wherever they work.

Artificial intelligence (AI) could also be rewriting the rules for stock valuation metrics. We almost certainly have yet to see the full impact of how AI will increase efficiency and profitability for companies. Agentic AI is only in its early stages. Multiple innovators are scrambling to develop artificial general intelligence (AGI) and AI superintelligence (ASI), technologies that could radically transform business and society, in general.

Buffett acknowledged in his 2001 Fortune article that the ratio of total stock market capitalization to GNP "has certain limitations." Probably the most important one is that it's only a snapshot. The metric doesn't reflect where market caps and GNP (or GDP) are headed. If AI unlocks massive value for businesses and the overall economy, the Buffett indicator's current high level could be misleading.

Betting against Buffett can be hazardous to your wealth

Could Buffett's dire stock market warning from years ago be completely wrong? I wouldn't dismiss the possibility.

Anthropic CEO Dario Amodei predicts that AI could increase unemployment by as much as 20% within the next five years. Tesla(NASDAQ: TSLA) CEO Elon Musk has stated, "AI and robots will replace all jobs." If they're right, corporate profits could skyrocket and perhaps make current valuation metrics such as the Buffett indicator practically obsolete.

However, while no one should rule out the potential for AI to revolutionize the business world, ignoring Buffett's warning could be a big mistake. Betting against the "Oracle of Omaha" can be hazardous to your wealth.

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

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.