According to the Buffett Indicator page, the U.S. stock market remains modestly overvalued to begin May as investors continue monitoring news regarding the bank crisis. On the other hand, several global markets remain undervalued based on Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio)’s market indicator concept.
U.S. market closes lower despite JPMorgan winning bid to acquire First Republic
On Monday, the Dow Jones Industrial Average closed at 34,051.70, down approximately 46.46 points from the previous close of 34,098.16. Despite this, the Dow opened at 34,116.81, up approximately 18 points from the previous close.
Shares of Dow Jones component JPMorgan Chase & Co. (JPM, Financial) increased more than 2% on the New York-based bank winning the weekend auction to receive a substantial majority of assets and deposits of First Republic Bank (FRC, Financial). JPMorgan Chase is fairly valued based on its price-to-GF Value ratio of 0.96 as of Monday.
As of March 31, First Republic Bank had $232.94 billion in total assets, up from $212.64 billion in total assets as of December 2022. Net loans were $172.50 billion as of March 31, up from net loans of $166.08 billion as of December 2022.
First Republic’s total liabilities were $214.95 billion as of March 31, up from total liabilities of $195.19 billion as of December 2022. Despite this, the bank’s total deposits declined from $176.44 billion as of December 2022 to just $104.47 billion as of March 31.
According to the transaction details, JPMorgan Chase acquired approximately $173 billion of First Republic’s loans, $30 billion of securities, $92 billion of deposits and $28 billion in FHLB advances. The bank did not assume any of First Republic’s corporate debt or preferred shares.
U.S. market remains overvalued following strong month of April
According to the S&P 500 Aggregated Statistics Chart, a Premium feature of GuruFocus, the mean one-month total return of the Standard & Poor’s 500 index stocks is 0.42% with a median of 0.72%.
The U.S. market indexes have gained at least 7% since hitting a two-month low in March amid the banking crisis. Despite this, the U.S. market remains modestly overvalued based on Buffett’s favorite market indicator, which captures the ratio of total market cap to gross domestic product.
As of Monday, the U.S. stock market is modestly overvalued based on a Buffett Indicator level of 117.3%. The market indicator ratio is computed using a Wilshire 5000 Full Cap Price Index level of $41.05 trillion, gross domestic product of $26.46 trillion and total Federal Reserve Bank assets of $8.56 trillion.
Based on the current market valuation level, the implied market return of the U.S. stock market is 3.2% per year over the next eight years, assuming valuations reverse to the 20-year median level of 94.84%.
The predicted and actual returns chart considers an optimistic case of reversion to 130% of the 20-year median and a pessimistic case of reversion to just 70% of the 20-year median. Based on this chart, the implied market return of the U.S. stock market may range between -0.9% per year and 5.3% per year.
Several global markets are undervalued based on Buffett’s indicator concept
GuruFocus’ Global Market Valuation pages extend Buffett’s market valuation concept to other regions, including Asia, Europe and emerging markets.
As of Monday, the Buffett indicator ratio for the Belgian stock market is 36.26%, showing the stock market is modestly undervalued compared to the 20-year minimum ratio of 23.01% and the 20-year maximum ratio of 77.62%. The calculation is based on total market cap of 330.81 billion euros (approximately $363.05 billion), gross domestic product of 558 billion euros and total central bank assets of 355 billion euros.
Based on the current market valuation level, the implied return of the Belgian stock market is 12.7% per year, assuming the valuations revert to the 20-year median ratio of 52.02%.
Singapore
As of Monday, the Buffett indicator ratio for the Singaporean stock market is 81.10%, showing the stock market is modestly undervalued compared to the 20-year minimum ratio of 53.86% and the 20-year maximum ratio of 177%. The calculation is based on total market cap of approximately 1 trillion Singapore dollars (approximately $748.7 billion), gross domestic product of S$582 billion and total central bank assets of S$652 billion.
Based on the current market valuation level, the implied market return of the Singapore stock market is 10.9% per year, assuming that valuations reverse to the 20-year median ratio of 112.14%.
Spain
As of Monday, the Buffett indicator ratio for the Spanish stock market is 28.79%, showing the stock market is significantly undervalued compared to the 20-year minimum ratio of 22.39% and the 20-year maximum ratio of 110.25%. The calculation is based on total market cap of 714.27 billion euros, gross domestic product of 1.31 trillion euros and total central bank assets of 1.16 trillion euros.
Based on the current market valuation level, the implied market return on the Spanish stock market is approximately 13.9% per year, assuming that valuations reverse to the 20-year median ratio of 55.28%.
Australia
As of Monday, the Buffett indicator ratio for the Australian stock market is 83.13%, showing the stock market is modestly undervalued compared to the 20-year minimum ratio of 68.1% and the 20-year maximum ratio of 141.19%. The calculation is based on total market cap of 2.55 trillion Australian dollars (approximately $1.69 trillion), gross domestic product of AU$2.43 trillion and total central bank assets of AU$638 trillion. 
Based on the current market valuation level, the implied market return of the Australian stock market is 10.6% assuming that valuations reverse to the 20-year median ratio of 96.19%.
