What if I told you the stock market is more overvalued today than at any time in the last nearly 100 years? According to legendary investor Jeremy Grantham—and even Warren Buffett—there’s a little-known metric flashing red that most investors are ignoring. If history is any guide, that means a painful market correction of at least 50% is on the horizon. Listen to Grantham explain.

Jeremey Grantham believes one of the most reliable tools for measuring market overvaluation is something called the Market Cap to GDP ratio, better known as the Warren Buffett Indicator. Warren Buffett himself once said that this ratio is “the best single measure of where valuations stand at any given moment.” So what is it?

At its core, the Warren Buffett Indicator is a way to measure how expensive or cheap the overall U.S. stock market is relative to the size of the actual economy. It works by taking the total market capitalization of all publicly traded U.S. companies and dividing it by the nation’s Gross Domestic Product, or GDP. Market capitalization reflects the total value investors are placing on publicly traded companies, while GDP represents the actual output of goods and services produced in the economy.

So why does this matter? Because when the market’s valuation climbs far above the value of the economy it’s supposedly based on, it suggests a disconnect between perception and reality. This disconnect is how bubbles form. If the ratio is extremely high, it means investors are pricing in aggressive assumptions—expecting future profits to grow at rates that may not be sustainable. In essence, a high Market Cap-to-GDP ratio is a warning sign that the stock market may be overvalued, propped up more by hype and optimism than by fundamentals. Historically, when this ratio reaches extreme levels—as it did in 2000, 2007, and again in 2021—it’s often followed by a significant market correction or crash.