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We should have seen it coming. The dotcom crash, that is. That’s what Warren Buffett said in 2001 when he pointed out that stock valuations had wildly exceeded the underlying economy. In that same interview, the ‘Oracle of Omaha’ suggested a super-simple formula that was later named The Buffet Indicator.
The indicator’s other name, the market-capitalisation-to-GDP-ratio, reveals the method — namely the market value of every company in a country divided by its GDP.
When the indicator gets too high, Buffett says returns in the stock market are likely to be poor over the next decade. Crashes are perhaps to be expected too, even if the economy underneath is chugging along nicely.
Here’s the kicker. The Buffett Indicator stood at 140% at the height of the dotcom bubble. On the day that I’m writing this, in early September 2025, the Buffett Indicator stands at 217%.
Uh-oh. Are we in danger?
Panic stations?
Time to panic? Perhaps not. One curious aspect of the indicator is its slow upward progression over the last 40 years. Whether it’s increased confidence in the stock market or more money invested than before, the valuations in listed companies have been slowly rising over time. Yes, the Buffett indicator is at record levels. Yes, that’s a reason to be wary. But this time might actually be different.
Another bit of good news is that we’re not dealing with the same level of problem on this side of the Atlantic. While the Buffett Indicator is 217% for the US, the same calculation returns 148% for the UK.
Newspaper headlines have been bemoaning the cheapness of British equities for years now and that cheapness does show up in the indicator too. Anyone looking for value in their portfolio could well keep a close eye on some promising FTSE 100 firms with some trading at hefty discounts compared to their American counterparts.
One stock
One UK stock that might fit the bill is AstraZeneca (LSE: AZN). The FTSE 100’s largest company by market cap is closely associated with one of the Covid vaccines. Its researchers (in partnership with the University of Oxford) developed the treatment that made Britain one of the first countries to take control of the pandemic.
But the Cambridge-based firm is no one-trick pony. The firm’s blockbuster drugs include Tagrissa, Symbicort, Farxiga and Crestor covering a wide variety of treatments with another 20 on course to be released by the end of the decade.
And for those concerned with expensive stocks, as hinted by Buffett’s indicator, AstraZeneca trades just at 15 times forward earnings. Compare that to the forward price-to-earnings ratio of US competitor Eli Lilly at 24. A pharmaceuticals producer lives and breathes its treatments, so nothing coming through the R&D pipeline can be a risk to the share price long term. Overall though, I’d say the £200bn pharma giant’s stock is one to consider.
