Aug 26, 2026
Warren Buffett has a favourite way to check whether stocks are too expensive: Compare the total value of the stock market to the size of the economy. In a 2001 interview, he said that when this ratio — now known as the Buffett indicator — climbs above 200%, investors are “playing with fire.” As of August 22, 2026, it sat at 235.9%, a level rarely seen in the gauge’s history.
For the many Canadians who hold S&P 500 index funds inside a TFSA or RRSP, that number is worth a second look — even if it isn’t, on its own, a reason to sell.
What is the Buffett indicator actually flagging?
Buffett has said that when the indicator sits in the 70% to 80% range, buying stocks is likely to work out well; above 200%, he warned, investors are taking on real risk. The last time it touched that lower range was at the bottom of the 2008 financial crisis.
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It isn’t the whole story, though. S&P 500 earnings growth has been strong over the past few quarters, largely on the back of artificial intelligence spending. Moreover, the forward price-to-earnings ratio on a broad S&P 500 fund sits around 20 — this is certainly elevated, but not in bubble territory by that measure alone. In other words, the market is pricing in a lot of optimism about future earnings. Whether that optimism is justified is the real question, and no single ratio answers it.
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Why this matters for Canadian TFSA and RRSP investors
S&P 500 exposure is common in Canadian registered accounts, whether through Canadian-listed funds or by holding a U.S.-listed fund directly inside an RRSP, where the Canada-U.S. tax treaty exempts investors from the 15% U.S. dividend withholding tax that applies inside a TFSA or non-registered account. That tax quirk doesn’t change the valuation picture, but it’s a reminder that a lot of Canadian retirement savings are directly tied to U.S. large-cap performance, which is exactly what the Buffett indicator is measuring.
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If a large share of your TFSA or RRSP sits in a single U.S. index fund, a historically expensive market means less room for error if earnings growth slows or interest rates move against stocks.
Should you sell your S&P 500 holdings?
History suggests caution about using this indicator as a timing tool. An investor who sold when it first crossed 140% in early 2015 and stayed in cash would have missed a roughly 350% gain in a Vanguard S&P 500 fund and a roughly 650% gain in an Invesco Nasdaq-100 fund since then.
The lesson isn’t that valuation doesn’t matter. It’s that a single number rarely tells you when a correction will happen. Instead, it shows when stocks are pricier than usual relative to the economy that ultimately supports their earnings.
What to do instead of guessing the top
A few practical steps make more sense than trying to time an exit:
- Check how concentrated your TFSA or RRSP is in U.S. large-cap stocks, and whether you have enough Canadian or international exposure to balance it out
- Keep contributing on a regular schedule instead of pausing because of one warning sign — dollar-cost averaging smooths out the entry price over time
- Use available registered room strategically — the RRSP contribution limit for this year is $33,810 giving long-term investors a tax-deferred place to hold both U.S. and Canadian positions while also sidestepping the dividend withholding tax
- Revisit your risk tolerance and time horizon, not the headline — investors closer to retirement have less time to ride out a downturn than someone in their 30s
The bottom line
An historically high Buffett indicator is a signal to check your diversification, not an instruction to sell. The more useful question for Canadian investors isn’t whether the market is expensive right now — it likely is, by this measure — but whether a portfolio is built to withstand a correction whose timing nobody can predict.
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Writer and editor based in Toronto with experience in personal finance, insurance, arts and culture and branded content.
