Warren Buffett’s favorite market indicator is signaling the stock market has reached the top. By comparing the value of the market to the size of the economy, you get an idea of where stock valuations stand, especially for stocks at 52-week highs.

Buffett once noted the indicator was “probably the best single measure of where valuations stand at any given moment.” Today, it suggests the stock market is bloated. MarketWatch recently ran the numbers and found the ratio above 2.0, which is a level last seen in 2022. Recall, that was the year the market significantly retraced the gains it had made following the pandemic.

Although MarketWatch noted Buffett doesn’t follow the metric anymore, it is still a useful way to gauge if the market is topping out. Investors should proceed with caution when buying stocks, particularly those at 52-week highs.

Even though the S&P 500 has pulled back from its all-time high in recent weeks, several stocks continue to push forward. Some are even setting new all-time highs of their own. Thus, the three companies below are stocks at 52-week highs or very close to their peak.

Now might be a good time to sell.

Walmart (WMT)

Retail king Walmart (NYSE:WMT) is on a tear. Shares are at an all-time high of over $70 a stub. First-quarter results were strong with revenue rising 6% year-over-year as both its domestic and international markets expanded. That allowed the retailer to easily surpass analyst earnings estimates, posting profits of 60 cents per share.

With the business firing on all cylinders, why sell? Higher margin goods are coming under pressure and after decades of expansion, Walmart may be reaching a saturation point in the U.S. That will require the retailer to focus more attentively on its e-commerce operations where it remains large and growing but comes nowhere near Amazon (NASDAQ:AMZN). It is also a much more competitive market.

While Walmart is in second place with a 6.4% share, it trails far behind the leader at well over 37%. Third place Apple (NASDAQ:AAPL) is quickly growing and has a 3.6% share, according to Statista. Walmart is not likely to gain much ground on its rival, and as its digital footprint grows, it will face more margin pressure on those higher margin items that have carried it. The physical side of the business could also see smaller rivals nip off business around the edges.

Invitation Homes (INVH)

Invitation Homes (NASDAQ:INVH) is the largest single-family rental real estate investment trust (REIT). Focusing on the new homes market in the starter home and move-up niche, Invitation’s economies of scale have allowed its stock to hit a new 52-week high of just under $37 a share.

Yet it may have reached its limit. Because it has used its size and the demand for rental homes to quickly raise rates, it may have priced many people out of the market. 

Invitation Homes just reported second-quarter results that saw revenue rise 9% but net income plummeted 47% to 12 cents per share and occupancy rates slightly decreased. It still stands at 97.5% but it indicates this could be a trend as renters are tapped out on paying higher costs.

The homebuilder market also continues to slide. Single-family housing starts fell 2.2% in June, an eight-month low, while building permits declined 2.3%, the lowest point in a year. It was especially acute in the Northeast and West, which is a problem for Invitation, as 37% of its homes are located in the western part of the U.S. This signals a growing problem for Invitation stock.

Spotify Technology (SPOT)

The world’s leading music streaming service Spotify Technology (NYSE:SPOT) recently soared to a new all-time high of $346 per share after second-quarter revenue jumped 20% from last year. Total monthly active users (MAUs) rose 14% to 626 million but more importantly, premium subscribers jumped 12% to 246 million.

Like Walmart, it raises the question of why sell now? While digital delivery of music and podcasts is likely to continue growing, Spotify will have to continue paying up for rights to the music. A small cabal of record labels controls 80% of the content thus, the oligopoly will be able to use its leverage to maintain pricing advantages by increasing costs.

Spotify also faces significant competitive pressure from the likes of Apple, Amazon and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Because streaming is not their primary profit driver, they can run their businesses at break-even rates or even a loss. 

Amazon Music, for example, is a side benefit of its Prime member loyalty program, though it does also offer a premium service. Apple Music and Apple Podcasts, which has a 21% share of the market, likely will not lose many subscribers to Spotify as its customers tend to stay within its ecosystem. Even bigger is iHeartMedia (NASDAQ:IHRT) with a 24% share for its iHeartRadio platform, according to eMarketer. Some 33% of people also get their music from YouTube.

With Spotify stock trading at 40 times projected earnings, it is a rich premium to pay even for the industry leader.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.