The Buffett Indicator, comparing U.S. market cap to GDP, is at a historic high of 230%, signaling potential declines of at least 25%. The S&P 500 is trading at 31 times earnings, similar to levels seen during the late 1800s and tech bubble. Wall Street is heeding these red flags, expecting lower returns.

Warren Buffett once called the Buffett Indicator the best measure of valuations, now at an all-time high of 230%, 77% above its trend line. The indicator is two standard deviations above its historical level, signaling overvaluation. Historically, such extremes have preceded S&P 500 declines of at least 25%.

Previous instances of the Buffett Indicator being stretched led to significant market declines. In the late 1960s, S&P 500 fell over 30%, while the 2000 tech bubble saw a 40% drop. 2021-2022 saw a 25% decline due to inflation and stimulus fallout. Current valuations suggest below-average returns and possible market pullback.

Investors should be cautious as the market is overvalued, historically leading to significant pullbacks. While not an immediate crash signal, the warning signs are clear. Future returns are likely to be lower, and volatility may return. Valuations matter, and investors should proceed with caution.

Read more at Yahoo Finance: The Buffett Indicator Is Hitting a Level Seen Only 3 Times in the Past 60 Years. History Says What Happens Next Won’t Be Good.