29 August 2025

Jonathan Sparks

Chief Investment Officer, UK, HSBC Private Bank and Premier Wealth

Over the past few years there is one question that keeps on coming up: how worried should we be that the “Buffet indicator” is flashing red? For those less devoted to the wise words of the “Sage of Omaha”, this indicator is derived from a comment Buffet made almost 25 years ago, where he pointed to the ratio of equity market capitalisation as a percentage of GDP as a good indicator of excessive valuations.

The success of this indicators is a much down to its intuitive simplicity, as it is a tangible warning of over-priced markets. It worked brilliantly with the DotCom bubble, although you would have to use a bit of hindsight in pinpointing the moment to act. But if you’d have used the 1990s as a blueprint, then from 2017 onwards you would have been a very nervous investor. With the exception of the 2020 Covid blip, you would have missed out on an almost tripling of US equity markets. 

Source: Bloomberg

The turn of events this week serves as a good example of why this indicator has lost its bite. As the start of the week France was tipped into a political crisis. Prime Minister Bayrou announced that he would deliver a policy statement and call a confidence vote on September 8th. This was a surprise to the market as Parliament was due to reconvince in October. This was effectively be a vote on Bayrou’s budget plans, that aim to reduce the fiscal deficit to 4.6% of GDP from their estimate of 5.4%. Clearly, this should have a meaningful bearing on government borrowing costs and growth in France.

As a result, the French CAC 40 index sold off by about 2%. Yet the entire market capitalisation of this index is just over USD2.4 trillion. The leading semi-conductor manufacturer in the US has a market capitalisation that is nearly double this. Take the top seven “magnificent 7” equities in the US and their market capitalisation totals at about 30% more than the entire top 600 holding in Europe; and 4 times the market cap of the top 50! The reality is that when the earnings for one mega-cap semiconductor manufacturer reported this week, the move that followed in its share price had almost double the impact on global equity markets than Bayrou’s announcement.

This means that when one of the top US technology companies report earnings, they have the power to move the overall equity market more than a sizeable, developed economy. The size of these tech companies, which dominate the playfield globally, also mean that they have began to decouple even from US growth - they are largely responsible for the Buffet indicator trending higher. Put simply, the US has become the home to the most dominate technology players in the developed world and the US market should be judged against the US GDP alone as these companies are global and fast growing.

While the breakneck progress in AI continues, these can continue to dominate. As this is a structural shift it also makes them less vulnerable to US growth. What will stand in the way of further Mag 7 gains will be their ability to continue generating earnings growth, rather than isolated indicators of value. This is not something we would be against, but we have recently locked in some gains on Communication Services stocks.

Source: Bloomberg