The Buffett Indicator has reached historic highs, signaling potential trouble for investors.
Despite facing challenges earlier this year, the stock market has largely thrived in 2025. The S&P 500 (^GSPC -0.38%) has surged over 14% recently, climbing an impressive 35% since April’s lows.
However, rampant growth can raise concerns, leading some investors to fear we’re in an overvaluation bubble poised to burst. While the future of the stock market remains uncertain, Warren Buffett’s well-known indicator suggests that investors might be “playing with fire” right now.
The Buffett Indicator in Dangerous Territory
The Buffett Indicator measures the total value of the U.S. stock market against GDP. Buffett popularized this ratio, having used it to accurately forecast the dot-com crash in the late 1990s.
In a 2001 interview with Fortune, he reflected on his earlier prediction, stating, “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and early 2000—you are playing with fire.”
As of October 2025, the Buffett Indicator stands at around 220%. For perspective, it peaked at nearly 193% in November 2021, shortly before stocks fell into a bear market that lasted almost a year.
It’s important to note that this figure doesn’t guarantee an impending recession or market crash. No stock market indicator is infallible, and as company valuations evolve, the Buffett Indicator may not hold the same predictive power it once did. The last time it dipped below 80%—the safer zone Buffett recommended—was in 2012.
How to Shield Your Investments from a Market Downturn
Regardless of when a market downturn might occur, it is inevitable. Fortunately, there are simple measures you can take to protect your portfolio, regardless of what lies ahead.
- Maintain Cash Reserves
One of the biggest risks during a recession or bear market is needing to withdraw funds after stock prices have dropped. If you invest all your spare cash and then face a job loss or unexpected expense, you may be forced to sell your investments at a loss.
Now is a good time to ensure you have a solid emergency fund with enough cash to cover three to six months of living expenses. If you lack emergency savings, it may be wise to pause investing and focus on building your safety net.
- Focus on the Long Term
Keeping track of daily market movements can be tempting and stressful. If you’re already anxious about a potential downturn, even minor dips can feel catastrophic. However, short-term fluctuations are common, even in strong economies, and long-term performance is what truly counts.
In 2008, Buffett penned an opinion piece for The New York Times to reassure discouraged investors during the Great Recession, highlighting that some investors lost money by only buying stocks when they felt confident and selling when headlines made them uneasy.
The short-term outlook may seem bleak, but that’s acceptable. What matters most is the long-term potential, which remains strong.
- Invest Wisely
A robust portfolio is crucial for weathering market downturns, making it a prime time to offload any shaky stocks while prices are still favorable.
Look for stocks from fundamentally sound companies with solid foundations. Organizations with experienced leadership, competitive advantages, and long-term financial plans are more likely to endure economic challenges. Owning more of these stocks will strengthen your position as you navigate a possible recession or bear market.
While the Buffett Indicator suggests we may be in a stock market bubble, the future remains unpredictable. For now, staying calm and taking proactive steps to prepare your investments is the best approach.
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