US Markets Remain Overvalued Post Christmas

On Monday, Berkshire Hathaway Inc. (

BRK.A, Financial)(BRK.B, Financial) CEO
Warren Buffett (Trades, Portfolio)’s favorite market valuation indicator stood at 153%, up from the Dec. 1 reading of 147.3% yet slightly down from the Nov. 2 reading of 153.5%. Based on this market level, the U.S. stock market remains significantly overvalued ahead of the New Year.

Markets start post-Christmas week with a bang

The Dow Jones Industrial Average closed at 36,302.58 on Dec. 27, up 352.02 points from the previous close of 35,950.56.

Likewise, the Standard & Poor’s 500 index closed at 4,791.21, a new record and up 65.42 points from the previous close of 4,725.79.

Stocks surged as investors look for a “Santa rally” despite continued increases in Coronavirus cases stemming from the new Omicron variant. JPMorgan Chase & Co. (

JPM, Financial) said in an analyst note that the Omicron variant may accelerate the end of the pandemic. New studies from South Africa, England and Scotland also suggest that Omicron may lead to less hospitalizations than other variant strains.

According to the Aggregated Statistics Chart, a Premium feature of GuruFocus, the mean day’s change of the S&P 500 stocks is 1.23% with a median of 1.28%.

For the Dow 30 stocks, the mean day’s change is 0.86% with a median of 0.96%.

Stock market remains highly overvalued

For the U.S. market, the ratio of total market cap to the sum of gross domestic product and total Federal Reserve assets stands at 153%, approximately 33% above the significant overvaluation threshold of 120%.

Based on the current market valuation level, the implied market return over the next eight years is approximately -1.4% per year, assuming valuations reverse to the 20-year median of 92.11%. The predicted and actual returns chart gives two alternative scenarios, including an optimistic case at 130% of the 20-year median and a pessimistic case at 70% of the 20-year median. The implied market return per year ranges between -5.5% in the pessimistic case and 1.7% in the optimistic case.