Warren Buffett’s “Best Single Measure” of Stock Valuations Just Made History — but Not in a Good Way.

For more than two years, Wall Street has been a stomping ground for the bulls. Since the curtain opened for 2023, the mature stock-powered Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-inspired Nasdaq Composite (NASDAQINDEX: ^IXIC) have respectively rocketed higher by 34%, 58%, and 88%.

But as Wall Street has reminded investors for more than a century, when things seem too good to be true, they usually are.

Though the Dow Jones, S&P 500, and Nasdaq Composite all recently hit fresh all-time highs, one time-tested valuation tool, which was once endorsed by billionaire investor Warren Buffett, is also in uncharted territory — but not in a good way.

There is no one-size-fits-all definition when it comes to “value.” What one investor considers to be expensive might be viewed as a bargain by another. Nevertheless, there are a handful of tried-and-true valuation tools that investors have relied on over the years to determine whether a stock, or the broader market, is relatively cheap, pricey, or somewhere in between.

Most investors are probably familiar with the price-to-earnings (P/E) ratio, which divides a company’s share price into its trailing-12-month earnings per share. This quick valuation measure tends to work wonders on mature businesses, but it’s not particularly useful for growth stocks or during periods of economic turbulence.

Source: FINANCE.YAHOO