The S&P 500 (^GSPC 1.52%) has been setting new records in 2026, up by nearly 21% over the last 12 months and around 41% since its low point in April of last year, as of this writing.
While that's cause for celebration for many investors, some are concerned that this bull market is nearing its end. Nobody can say when the next downturn will begin, but it's inevitable that stocks will fall at some point. And according to one popular stock market metric, investors might want to start preparing.
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A potential warning sign for investors
There are many stock market metrics out there, but one of the more popular ones is the Buffett indicator. Nicknamed after Warren Buffett, this metric measures the ratio between U.S. gross domestic profit (GDP) and U.S. stock market capitalization. Buffett popularized it in the early 2000s after he used it to correctly predict the onset of the dot-com bubble burst.
In a 2001 interview with Fortune magazine, Buffett explained his reasoning behind why this metric was a bear market predictor.
"For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you," he said. "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."
As of this writing, the Buffett indicator ratio sits at 222%. The last time it approached 200% was in November 2021, when it hit a high of around 193%. Just months later, the S&P 500 began its fall into a bear market that would last most of the year.
Is a recession coming?
No stock market metric is 100% accurate. If it were, we would all be timing the market perfectly. The Buffett indicator has its critics, and as company valuations soar, it may not be as accurate as it was two decades ago.
Still, though, the fact that this metric is at a record high could be a warning to investors. This doesn't necessarily mean a bear market or recession is imminent, and the market could have further to climb before the next pullback begins. But it may be a warning to exercise caution when deciding where to invest.
Right now is the time for investors to prepare their portfolios. Double-check that all of your stocks are from solid companies with potential for long-term growth. Strong businesses have the foundations to survive market turbulence, which is more important than ever.
If you have stocks that are no longer healthy, now can be a smart time to unload them while prices are still surging. Again, no stock market indicator can say what the market will do in the near term. However, by taking steps to protect your portfolio ahead of time, you'll be more prepared for the next downturn -- whenever it may begin.
