The S&P 500 has reached new highs in 2026, gaining nearly 21% over the last 12 months and about 41% since its low in April last year. While many investors are celebrating, concerns are growing that the bull market may be ending. Stocks will inevitably fall at some point, and one market metric suggests preparation may be wise.
A popular stock market metric known as the Buffett indicator is currently at 222%. This indicator measures the ratio between U.S. GDP and U.S. stock market capitalization. Warren Buffett popularized it in the early 2000s after using it to predict the dot-com bubble burst.
In a 2001 interview with Fortune magazine, Buffett explained the indicator. "For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you," he said. "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."
The last time the indicator approached 200% was in November 2021, when it hit around 193%. Months later, the S&P 500 entered a bear market that lasted most of the year.
No stock market metric is 100% accurate. The Buffett indicator has critics, and with company valuations soaring, it may not be as reliable as decades ago. Still, its record high could serve as a warning. This does not mean a bear market or recession is imminent, and markets could climb further before a pullback. But it may signal caution in investment decisions.
Investors are advised to prepare portfolios now. Check that stocks are from solid companies with long-term growth potential. Strong businesses can better survive market turbulence. If stocks are no longer healthy, it may be smart to sell while prices are high. No indicator can predict near-term market moves, but taking protective steps can help prepare for the next downturn.
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