According to Warren Buffett’s math the stock market is officially in ‘playing with fire’ territory. So when is the next crash coming?

When Warren Buffett gets nervous, you and I should probably be nervous too. The Oracle of Omaha has long held to a simple maxim when it comes to whether the stock market is undervalued, fairly valued, or overvalued. His thesis: The total value of U.S. stocks, over the long term, can’t outpace the growth of businesses as reflected in the GDP. So when the ratio of S&P 500 to national income diverts hugely from the norm, it is bound to swing the opposite way and “revert to the mean.” During the Dot Com bubble, in a 2001 story in Fortune that he penned , Buffett highlighted a chart in the text displaying that at the craze’s peak in March 2000, that number, now known as the “Buffett Indicator,” reached a heady 200%. “The message of the chart,” he wrote, “is that if the relationship [between the total value of equities and GDP] drops to 70% or 80%, buying stocks is likely to work out very well for you. If it approaches 200% as it did in 1999 and 2000, you are playing with fire.” Indeed, the S&P had already fallen over 20% by the time the Buffett story appeared, and by mid-2022 retreated by almost one half from its peak, taking the Buffett Indicator below 80%. As the Buffett formula predicted, the tech rampage’s aftermath proved a great moment to buy. Which brings us to the present. Since the stock market decline prompted by the surprise start of the Iran war, the S&P 500 has rebounded to a near all-time record of 7165. Here’s the shocker: The Buffett Indicator now stands at 227% , a figure that’s around one-sixth higher than what he identified as the prepare-for-a-roasting zone. A reading this elevated comes with two problems. First, corporate profits have been waxing much faster than GDP. The bulls claim that trend justifies today’s valuations, and that EPS can keep rolling in double digits while national income trudges at a nominal 5% or so. The argument’s dubious: Profits are now 12% of GDP versus an historic average of 7% to 8%. In our highly competitive economy, fat…