Overbought Stock Markets: How Realistic is a Major Crash Right Now?

Global stock markets have experienced an impressive rally in recent years. Despite a challenging environment marked by rising interest rates, high inflation, and geopolitical tensions, many indices have reached record highs. The S&P 500 has risen by 82% over the past five years, with 24% of that growth occurring in the past year alone. However, while investor optimism remains high, experts are increasingly warning of a potential correction or even a crash. Macroeconomic indicators such as the Buffett Indicator and the Shiller P/E ratio suggest a possible overvaluation of the markets.

Bitcoin at $100,000: An Indicator of High Risk Appetite?

Bitcoin recently surpassed the symbolic $100,000 mark, reaching a new all-time high. This rally is primarily driven by increased institutional investor engagement and the expectation of a crypto-friendly political environment. However, Bitcoin remains highly volatile, and the digital currency is not backed by tangible assets. A sudden price drop could have spillover effects on traditional financial markets.

The Buffett Indicator: Clear Market Overvaluation?

The Buffett Indicator, which measures the ratio of total stock market capitalization to gross domestic product (GDP), currently stands at around 203%. Historically, a value above 100% signals overvaluation, and the current level is one of the highest ever recorded. Warren Buffett himself has increased Berkshire Hathaway's cash reserves to a record $325 billion – possibly a clear warning sign.

However, the indicator has its limitations: In times of low interest rates, investors are more willing to accept higher valuations, and the global revenues of multinational corporations are not fully reflected in the indicator.

The Shiller P/E Ratio and S&P 500 Valuation

The Shiller P/E ratio, which uses average earnings from the past ten years to assess valuations, also signals caution. With a current value of 37.3, it is well above its historical average. The traditional P/E ratio of the S&P 500, at 30, similarly indicates significant overvaluation.

Yet, the question remains whether future earnings growth can justify these high valuations. Technological innovations, particularly in the field of Artificial Intelligence (AI), offer immense potential for productivity gains and could improve margins and profits for many companies.

How Likely is a Crash?

A major crash is never entirely predictable, but current indicators suggest caution. Markets are highly valued, and the risk of a pullback is real. A correction of 20% to 30% would be economically plausible and historically not unusual.

Conclusion: Caution Over Panic

While an immediate crash is not inevitable, investors should proceed with caution. New investments should be carefully considered and not made blindly out of FOMO (Fear of Missing Out). Highly overvalued stocks with low growth potential deserve a critical review.

In the long run, stock markets still offer potential, but the short term could be turbulent. Trees don't grow to the sky, and current optimism should be balanced with a healthy dose of skepticism.