On Friday, the U.S. stock market remained significantly overvalued based on Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s market indicator concept. On the other hand, several markets around the globe are undervalued based on the total market cap to gross domestic product ratio.
Dow set for losing first week of the second half
The Dow Jones Industrial Average traded around 33,872.25, down 50.01 points from the previous close of 33,922.26 and 535.35 points from the June 30 close of 34,407.60.
The U.S. stock indexes tumbled for the week as investors feared the Federal Reserve may resume interest rate hikes following job growth data. Even though the Labor Department reported total nonfarm payrolls increasing just 209,000 in June, down from the Dow Jones consensus estimate of 240,000 jobs added, Automatic Data Processing Inc. (ADP, Financial) said private sector jobs surged 497,000 in June, more than twice the consensus estimate of 220,000 jobs added and the downwardly revised May gain of 267,000 jobs.
According to the Aggregated Statistics Chart, a Premium feature of GuruFocus, the mean one-week total return of the Standard & Poor’s 500 Index stocks is -0.56% with a median of -0.53%.
Apple hits $3 trillion market cap
On June 30, shares of Apple Inc. (AAPL, Financial) closed at $193.97, propelling the Cupertino, California-based consumer electronics giant’s market cap above $3 trillion. The stock is modestly overvalued based on its price-to-GF Value ratio of 1.11 as of Friday.
Apple has a GF Score of 93 out of 100 based on a rank of 10 out of 10 for profitability and growth, a momentum rank of 9 out of 10, a financial strength rank of 7 out of 10 and a GF Value rank of 3 out of 10.
As of the first quarter, Berkshire owns 915,560,382 shares of Apple, giving the position 46.44% weight in its 13F equity portfolio. The position has been Berkshire’s largest holding since December 2017.
Summary of market valuations for the U.S. market
The ratio of U.S. total market cap to gross domestic product stood at 128.6%, up approximately 8.2% from the June 2 reading of 120.4%. The current market valuation ratio is based on a Wilshire 5000 Full Cap Price Index of $44.82 trillion, gross domestic product of $26.53 trillion and total Federal Reserve Bank assets of $8.34 trillion.
Based on the current market valuation level, the implied return of the U.S. market is approximately 2.1% per year, assuming the valuation reverses to the 20-year median ratio of 95.26%.
The predicted and actual returns chart also considers two alternative cases: an optimistic case in which valuations reverse to 130% of the 20-year median ratio and a pessimistic case in which valuations reverse to just 70% of the 20-year median ratio. Based on this chart, the implied return of the U.S. market ranges between -2.1% per year and 4.20% per year.
Other market valuation measures exist for the U.S. stock market, including Robert Shiller’s cyclically-adjusted price-earnings ratio and the GF Value for the S&P 500.
As of Friday, the Shiller price-earnings ratio of the S&P 500 stood at 30.7, compared to the 20-year low of 13.3 and the 20-year high of 38.6. The current valuation ratio is approximately 17.1% higher than the 20-year median ratio of 26.1.
Based on Shiller’s market valuation, the implied return of the U.S. market is approximately 3.9% per year assuming that valuations reverse to the 20-year median.
GuruFocus also calculated the GF Value for the S&P 500. Patterned after the Peter Lynch earnings line, the GF Value considers historical price multiples and adds internal adjustments for past performance and future growth estimates. For the S&P 500, the GF Value considers several price multiples of the index, including price-earnings, price-book and price-sales.
As of Friday, the S&P 500 is fairly valued based on its price-to-GF Value ratio of 0.97.
Users can identify undervalued markets around the globe using Buffett’s market indicator concept
GuruFocus’ Global Market Valuation pages apply Buffett’s market indicator concept to more than 25 stock markets around the globe, including European markets, Asian markets and emerging markets.
As of Friday, several emerging markets, including Pakistan, Egypt and Brazil, are undervalued based on the Buffett Indicator concept.
The Pakistani stock market is significantly undervalued based on its market valuation ratio of 10.21%, compared to its 10-year minimum of 9.29% and its 10-year maximum of 25.28%. Based on this market valuation level, the implied return of the Pakistani stock market is approximately 22% per year assuming that the valuation reverses to the 10-year median of 21.8%.
The Egyptian stock market is modestly undervalued based on its market valuation ratio of 10.97%, compared to its 10-year minimum of 7.03% and 10-year maximum of 24.28%. Based on this market valuation level, the implied return of the Egyptian stock market is 18.1% per year assuming that the valuations reverse to the 10-year median of 17.61%.
The Brazilian stock market is fairly valued based on its market valuation ratio of 35.8%, compared to its 10-year minimum of 20.03% and 10-year maximum of 46.87%. Based on this market valuation level, the implied return of the Brazilian stock market is 13.8% per year assuming that the valuations reverse to the 10-year median of 33.68%.
Other stock markets that are undervalued based on Buffett’s market concept include Singapore, Belgium, Australia and Spain.
