Warren Buffett, the renowned investor and former CEO of Berkshire Hathaway, has remained an influential figure in the stock market, even after stepping down at the close of 2025. With shares in Berkshire Hathaway valued at over $100 billion, many speculate that he continues to monitor market trends closely, particularly given concerns about a potential market crash. One tool he pioneered, known as the “Buffett Indicator,” serves as a critical measure of stock market valuations.
The Buffett Indicator compares the total market capitalization of a given stock market to that country’s Gross Domestic Product (GDP), expressed as a percentage. Buffett regards this comparison as one of the best indicators for assessing market valuations. As of early February, the indicator for the U.S. market stands at an alarming 218%, approaching its historical peak recorded in January and significantly exceeding the 20-year average of 127%. This raises red flags for investors, as historically, high valuations can signal an impending market correction.
Critics of the Buffett Indicator point out its limitations, notably that GDP focuses on domestic economic activity while many companies generate revenue internationally. Past investors who heeded the indicator’s warnings in 2013 and 2020 missed substantial market recoveries that followed. Thus, while the indicator offers valuable insights into overall market health, relying solely on it for investment decisions could prove risky.
On the other side of the Atlantic, the situation appears somewhat more stable in the UK. The UK’s version of the Buffett Indicator currently reads at 117%. This figure aligns with the average from the past two decades, though it has seen a sharp uptick since early 2025. Importantly, this reading remains below the peak of 139% noted in 2018. Nonetheless, market analysts caution that a significant downturn in the U.S. market could trigger similar volatility in the UK.
An example highlighting current market dynamics is Rolls-Royce Holdings. The company’s share price seems increasingly disconnected from its underlying earnings, reflecting both strong market confidence and potential risks ahead. Recent profit upgrades and a robust post-pandemic recovery have driven a significant rally in Rolls-Royce’s share price since the beginning of 2023. However, this has also led to speculation about whether a correction is on the horizon.
Despite the elevated share prices and modest dividend returns, Rolls-Royce boasts a promising order book and opportunities in the emerging small modular reactor market. Furthermore, plans to re-enter the narrowbody aircraft engine sector could dramatically reshape its future. While share valuations may appear high, they are justifiable if the company can sustain its earnings growth.
Yet, any indication of a slowdown would likely lead to a drop in share prices. Still, given its solid reputation and long-term growth potential, Rolls-Royce remains a compelling choice for investors willing to adopt a long-term perspective amid the market’s fluctuations.
