Are U.S. markets overvalued now? What does the Buffett Indicator say about valuation?
- Remin Francis I R
- Jul 9
- 3 min read
Over the past few months, the global financial world has been walking a tightrope. With major shifts in trade policy, especially the tariff hikes announced by the US in April 2025, markets have seen significant swings. These developments have sparked a familiar question: "Are we heading toward a market bubble?"
Let’s unpack what the Reserve Bank of India’s latest Financial Stability Report has to say- in simple terms.
The US Market: Caution Signs Flashing
The US equity market, which makes up more than half of the global equity market, has shown signs of stress. In April 2025, stock prices dropped sharply after new tariffs disrupted trade flows. Though the markets have since bounced back, a few red flags remain.
One major concern is valuation. The price-to-earnings (P/E) ratio in the US is well above historical averages, meaning investors are paying a lot for every dollar of expected earnings. On top of that, the “equity risk premium”, the extra return investors expect over risk-free bonds, has fallen to decade lows. That’s another way of saying investors might not be getting enough return for the risk they’re taking.
What’s driving these high valuations? A big chunk of it is hope, hope that earnings will continue to grow at a fast clip. But with trade tensions, slowing global growth (the IMF has cut 2025 projections to 2.8%), and high public debt levels, it’s not clear that earnings can keep up. Stress in the US bond market considered the safest corner of the financial world, has already shown signs of trouble.
India: Resilient, But Not Immune
While the global picture looks shaky, India has stood strong. Our economy is growing at a healthy pace, inflation is under control, and the financial system is stable. The RBI projects GDP growth of 6.5% in 2025-26, supported by strong domestic demand.
However, India isn’t completely insulated. As the report notes, “global spillovers”, like reduced investor appetite or weakening exports due to a global slowdown, could affect us. Already, foreign portfolio investments have moderated, and market volatility has ticked up slightly.
Still, domestic financial institutions are well-capitalised, non-performing loans are low, and stress test results show that Indian banks can withstand even adverse scenarios. Our forex reserves are strong, and inflation is expected to stay within target.
Side-by-Side Comparison of Valuation Points
What Should Investors Do?
In today’s market environment, where optimism often runs high, investors need to remain grounded. One useful tool for gauging overall market valuation is the Buffett Indicator, which compares a country’s total stock market value to its GDP. As of July 2025, the United States stands at an elevated 207%, while India ranges between 124% to 129%, both well above their historical averages.
These levels suggest that equity markets, particularly in the US, maybe priced ahead of fundamentals. However, high valuations don’t always mean an imminent correction; they simply indicate the need for measured decision-making. Rather than exiting the market, investors should focus on building a diversified portfolio, sticking to quality businesses, and avoiding areas with excessive froth.
Monitoring valuation metrics like the Buffett Indicator can serve as an early warning, helping investors align their risk exposure with long-term goals. A balanced approach, cautious but not fearful, is the key in such environments.
Disclaimer: This content is for educational purposes only; please conduct your own research and consult with a qualified investment advisor before making any investment decisions.
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