Are stocks overvalued? That’s the million-dollar question at a time when valuation appears to have powered through the roof. Amidst the concerns, stocks have continued to edge higher and showing no signs of slowing down. However, economists and market analysts are increasingly calling for caution as a correction could be imminent.
Warren Buffett Warning
A Warren Buffett indicator, which over the years has provided signals of a potential correction, is currently flirting with record highs signaling stocks are overvalued. The indicator divides the total market capitalization of publicly-traded stocks by quarterly Gross Domestic Product.
With the Wilshire 5000Total Market Indexsurging to $38.2 trillion and Q3 GDP coming in at $21.2 million, it’s clear theBuffett indicator has crossed the 180% mark and closing in on its peak of 187%. According to the famed investor, when the indicator spiked to record highs during the dot.com boom, a ferocious correction swiped the stock market. The indicator also surged in the months to the 2008 financial crisis.
While the indicator has provided accurate signals in the past, it might not in the COVID-19 fuelled valuations. Economists insist that comparing stock values with the previous GDP is not real. COVID-19 has caused significant disruptions to economic activity, conversely depressing GDP.
IPO Demand Concerns
Amid the stock valuation concerns, Goldman Sachs CEO David Solomon remains wary of the intense demand for initial public offerings, especially among retail investors. The sentiment comes hot on the heels of DoorDash and Airbnb going public and seeing major spikes in share price after they began to trade.
DoorDash closed the first day of trading up 85%, with Airbnb stock soaring 112% the following day. While great businesses back the stocks, the Goldman CEO believes that the market is pricing in perfection execution and enormous growth for a very long period.
A strong appetite for IPO is one factor that has continued to fuel the bullish momentum in the stock market. For how long investors will continue shrugging valuation and fundamentals in pricing stocks remains to be seen.