Buffett calls time – so what does his favourite gauge say about the ASX?

As Buffett steps back after a legendary run, does his favourite market gauge suggest the Aussie market might be running a little rich?

Buffett hangs up his boots. Picture via Getty Images

• Buffett bows out after 5 million per cent run

• One of Buffett's favourite signals is the Buffett Indicator

• ASX might be running a little hot according to that signal

After six decades at the helm of Berkshire Hathaway and a career that delivered a casual 5.5 million per cent (5,502,284%) return, the 94-year old Oracle of Omaha, Warren Buffett, is finally calling time.

“There’s never been someone like Warren,” Apple CEO Tim Cook said after Buffett caught everyone off guard by announcing he’ll hand over the keys to Greg Abel by the end of the year.

“Countless people, myself included, have been inspired by his wisdom.”

But while CEOs from Cook to Jamie Dimon line up with tributes, the rest of us investors are now left to navigate the noise without the calmest voice in the room.

Who do we turn to now, when markets go haywire or the hype gets too loud, to ask the question that’s guided us for decades: "What would Warren do?"

Well, he probably wouldn’t be chasing meme stocks or throwing darts at AI tickers.

Buffett’s philosophy was always about the long game; buying quality at a fair price, letting it compound, and doing almost nothing else.

But behind the homespun quotes and Coca-Cola cans sat something far more powerful: a razor-sharp understanding of value.

The Buffett Indicator

One of his favourite tools for assessing whether markets were looking frothy or fair is the so-called Buffett Indicator.

It’s simple enough: take the total market cap of all listed companies in a country, and divide it by that country’s GDP.

Buffett Indicator = Market Cap of Country's Stockmarket / Country's GDP

Think of it this way: the stock market reflects what we expect to happen in the future, while GDP shows what’s actually just happened.

So when you compare the two, you’re basically looking at how much optimism is baked into current share prices.

Buffett once put it, “This indicator is probably the best single measure of where valuations stand at any given moment.”

It’s kind of like a P/E ratio, but for the whole economy.

Over time, you’d expect the ratio to stay fairly steady, only creeping up as tech and innovation help us squeeze more out of the same effort and capital.

According to Buffett, if the Indicator is under 70%, the market might be cheap.

If it’s somewhere between 70 and 100%, it’s probably fairly valued.

But once you start drifting north of 100%, well, Buffett might start reaching for red pen for a bit of caution.

How’s Australia looking?

So let’s try it the Buffett way and see how Australia stacks up.

As at the end of April, the total market capitalisation of the ASX is sitting around $2.9 trillion. Meanwhile, Australia’s GDP for the 2024 financial year clocks in at around $1.8 trillion.

Crunch the numbers and you get a Buffett Indicator of about 160%.

That’s well above the fair-value range. Not full-blown alarm bells, but it’s definitely running hot.

By this yardstick, the ASX is priced about 60% higher than the real economy, a level that would likely make Buffett pause and double-check the fundamentals.

But context matters.

Unlike the US, where tech titans dominate, the ASX is more weighted toward banks, miners, and big energy.

These are sectors tied closely to the physical economy, and often to boom-bust commodity cycles.

So a Buffett Indicator of 160% here doesn’t mean the same thing as 160% in Silicon Valley.

And then there’s the global flow of capital.

Aussie stocks are open season for global investors hungry for dividends, lithium, and iron ore. That foreign money can inflate valuations regardless of what GDP is doing.

So, is this a warning for investors?

Not quite.

The Buffett Indicator isn’t a market timing tool. Buffett himself would be the first to say that.

It’s more of a compass than a countdown clock. It tells you roughly how stretched things might be, but not when or how the rubber band might snap.

Still, at 160%, it’s worth being aware. Especially as rates settle, China cools, and investors recalibrate what they’re willing to pay for steady cash flows.

Buffett’s legacy, meanwhile, isn’t just about compounding returns or cheeky shareholder letters. It’s about staying grounded while everyone else is chasing fads.

And that’s what the Indicator reminds us to do: take a breath, zoom out, and ask whether the price still matches the promise.