Good morning, investors. Stocks are now worth 2.4x the U.S. economy, the highest level ever recorded.
And history suggests markets don't stay this expensive forever.
Here's what happens next ↓
Uncharted Terriority
The Buffett Indicator just reached 239%, the highest level on record.
The Buffett Indicator compares the total value of the U.S. stock market to the size of the U.S. economy.
It's one of the broadest measures of market valuation.
Warren Buffett once said that when this ratio approaches 200%, investors are "playing with fire."
We're now well above that.
For me, this means one thing:
Now is the time to stay cautious.
Here are five more reasons why:
16 of the 20 valuation metrics I follow are well above their historical averages.
Stocks are becoming increasingly jittery. Q2 earnings already showed how quickly markets punish even small disappointments.
Hedge funds are selling technology stocks at the fastest pace in 10 years, suggesting capital is rotating into more defensive areas.
Warren Buffett is sitting on roughly $397 billion in cash and Treasury bills while previously describing today's market as “a casino”.
Jamie Dimon warns that markets may be underestimating risk and says he wouldn't be buying either stocks or Treasuries at current prices.
Does this mean a crash is coming tomorrow? No.
Bull markets can stay expensive for much longer than most investors expect.
But my research points to one conclusion:
Something is changing.
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Portfolio Update
Wall Street expects S&P 500 earnings to grow 22.5% y/y in Q2 alone. And this means these high expectations will lead to volatility around Q2 earnings reports (as we have seen with IBM, NFLX, AMC and others).
As of today, I’m still holding a significant amount in cash.
Elsewhere
🏦 Jamie Dimon says markets underestimate risks and he wouldn’t buy stocks or Treasurys at current prices. He sees growing geopolitical and fiscal risks ahead. I think he may be right. (CNBC)
☁️ Alphabet reports earnings tomorrow, with all eyes on Google Cloud. Analysts expect $101.22 billion in total revenue (+23.9% YoY), while Cloud is forecast to grow 67.3%. AI spending has made Cloud the key metric and I think this carries risk. (Yahoo Finance)
🏠 It’s now cheaper to buy a new home than a used one. For the first time since at least 1974, new homes cost less than existing ones as builders cut prices and homeowners hold firm. The U.S. housing market is becoming harder to predict. (Yahoo Finance)
🚀 SpaceX stock closed at a fresh low after seven straight days of losses. Shares have fallen 47% from their IPO peak, extending the selloff that began shortly after its record-breaking debut. This was expected as no company deserves such a valuation. (Investopedia)
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