MW 'Buffett Indicator' warns of a market top - 8 crucial signs that stocks are running on fumes
By Satyajit Das
From a grotesque 230% valuation gap to a ticking energy crisis, this unstoppable market is more fragile than it looks
Is the bull market on its last legs?
Ebitda now might as well stand for "earnings before Iran, tariffs and Donald announcements."
The U.S. stock market looks indestructable. Nothing - not war, inflation, higher interest rates, economic slowdown, doubts about earnings or technologies, questionable leadership, not damage to institutions - can dent it.
But there are reasons to be skeptical about the rally's sustainability - eight of them, in fact.
1. Investors are still assuming a short Iran war because of TACO (Trump always chickens out) - ignoring the risk of NACHO (Not a chance Hormuz opens).
2. The market's gains are mostly around technology. The combined value of semiconductor companies valued at more than $10 billion has soared 26% since February. Meanwhile, the Stoxx Europe Total Market Semiconductors index XX:T9576P has increased about 75% over that time. Emerging markets are powered mainly by Taiwanese and Korean chipmakers, such as TSMC $(TSM)$ and Samsung Electronics (KR:005930).
Some investors have rotated into defense and commodity companies or HALO (high assets low obsolescence) stocks - traditional boring companies that build, own and operate hard assets. While these have benefited from the Iran war, their price moves are inconsistent with the narrative of an imminent end to hostilities. High oil prices, for example, lead to demand destruction, which reduces prices and earnings. Many of these HALO companies are capital-intensive with volatile, cyclical profits.
3. Strong corporate earnings, which investors rely on, are backward-looking and ignore important factors. For example, Ebitda now might as well stand for "earnings before Iran, tariffs and Donald announcements." Automobile manufacturers and heavy industries are feeling the adverse affects of higher commodity prices, higher rates, slowing economic activity and increased uncertainty. Rising jet-fuel costs, up more than 70% since the Iran conflict started, have affected airlines and were a factor in the failure of Spirit Airlines and its 17,000 job losses.
Established tech firms will be affected by their large investments in AI-related ventures, which may struggle to generate cash and returns on the large investments. This now absorbs most of their free cash flow, reducing their ability to increase distributions or repurchase shares. The early 2026 "SaaSpocalypse" highlighted how AI could reduce the profitability of traditional software-as-a-service business.
Historically, innovative technologies, even if they work, rarely reward investors. It takes years for the infrastructure to be fully utilized, productivity to increase and profits to emerge. Many of the original ventures that commanded huge market valuations fail.
4. Prices are supported by a few large, risky corporate transactions, such as the Skydance/Paramount merger $(PSKY)$. The IPO of SpaceX is expected to be valued at around $1.75 trillion. The valuations underlying these transactions require unlikely growth in earnings or expansion of already grotesque multiples. The U.S. stock-market capitalization to gross domestic product - aka the "Buffett Indicator" - is pushing 230% compared to 65% in 1929, 90% in 1987 and 170% in 2000.
5. Economic conditions are weakening. With the full restoration of energy and other material supplies likely to take time after the eventual end of the Iran hostilities, supply chains may remain constrained and prices elevated for an extended period. The full impact of higher prices on essentials like food and utilities will only emerge slowly as higher energy prices and shortages bleed into the economy.
Higher inflation means higher rates for longer, particularly for longer maturities, affecting mortgage rates and the housing industry. There is also pressure on rates from higher government deficits due to the costs of the war, with the administration seeking to boost defense spending by 44% to $1.5 trillion.
These forces will curtail consumption. Households in the bottom third by income distribution are now consuming 7% less gas, although spending by the top third of earners remains largely unaffected. This will affect growth and corporate profitability.
6. Much of the market's gains are driven by momentum purchasers such as quantitatively-driven traders and exchange-traded funds, which are fragile and rapidly changeable.
7. There is faith that the U.S. government will support prices in the form of stimulus and bailouts. However, the scope to cut rates and government spending is now limited by inflation, government debt levels and bloated central-bank balance sheets and already loose monetary policy.
8. Prices are based on belief in TINA ("there is no alternative"), that is, the money must be invested somewhere. Younger retail investors, who have never experienced a major market downturn, continue to buy every dip because they're convinced that stock prices only go up and declines are buying opportunities. These investment myths are unhelpful and unrealistic.
Read: The bond market just flipped the script on investors - Wall Street is acting like nothing's wrong
The late 1990s dot-com boom provides an important marker. When that boom ended, even survivors like Microsoft $(MSFT)$, Apple $(AAPL)$, Oracle $(ORCL)$ and Amazon.com (AMZN) fell 65%, 91%, 88% and 94%, respectively, taking 16, five, 14 and seven years to recover their 2000 peaks.
AI investment may be 17 times that of the 2000 dot-com and four times the 2008 sub-prime housing bubbles. Rather than equity, it is funded by debt, with the amount tied to AI totaling around $1.2 trillion, 14% of all investment-grade debt.
One commentator termed this stock melt-up the "bliss trade." Leo Tolstoy wrote that there is no happiness in life - only its glimmers. Investors will do well to remember that.
Satyajit Das is a former banker and author of Traders, Guns & Money, Extreme Money, and A Banquet of Consequences - Reloaded ( 2021).
More: Nvidia can deliver chips - but it can't buy Big Tech out of its credit and power-grid crisis
Also read: Your bond portfolio is facing a 'termite' infestation far worse than Jamie Dimon's 'cockroaches'
-Satyajit Das
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(END) Dow Jones Newswires
May 21, 2026 21:23 ET (01:23 GMT)
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