Warren Buffett's favorite market gauge surges to record high, signaling global stocks are overpriced and poised to tumble

• Warren Buffett's favorite metric suggests global stocks are pricier than ever.
• The "Buffett indicator" reached 123%, exceeding its level during the dot-com boom.
• Economic shutdowns and government stimulus have fueled the record readings.
• See more stories on Insider's business page.

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Warren Buffett's preferred market gauge has surged to an all-time high, signaling global stocks are extremely overpriced and could crash in the coming months.

The global version of the "Buffett indicator" has breached 123%, surpassing its previous record of 121% during the dot-com bubble. The milestone was first highlighted by the Welt market analyst Holger Zschaepitz on Twitter.

The metric takes the combined market capitalizations of publicly traded stocks worldwide, and divides it by global gross domestic product. A reading of 100% or more suggests the global stock market is overvalued relative to the world economy.

Buffett, the billionaire investor who runs Berkshire Hathaway, trumpeted the indicator in a Fortune magazine article in 2001. He described it as "probably the best single measure of where valuations stand at any given moment."

When the yardstick hit a record high before the dot-com bubble burst, that should have been a "very strong warning signal," Buffett added.

However, Buffett's favorite indicator has several shortcomings. For example, it compares current stock valuations to past GDP figures. Not all countries provide regular, reliable GDP data either.

The gauge's elevated level also reflects the fact that pandemic-linked lockdowns, business closures, and travel restrictions have depressed economic growth. Meanwhile, government interventions have artificially pumped up stock prices.

For example, the Buffett indicator continues to flirt with record highs in the US, partly because federal officials have pumped trillions of dollars into the economy over the past year.

Here's the global version of the Buffett indicator: