About the indicator

“It is probably the best single measure of where valuations stand at any given moment.”

The formula

The Buffett Indicator divides the total market capitalization of US publicly-traded stocks by the country's Gross Domestic Product (GDP):

Buffett Indicator = (Total US Market Cap / US GDP) × 100

Why it matters

Equity prices reflect expectations of corporate earnings — and corporate earnings ultimately depend on the size of the economy. When market cap runs far ahead of GDP, prices imply growth that the economy may not deliver. Historically, very high readings have preceded periods of weak forward returns; very low readings have preceded strong ones.

Limitations

• Foreign revenue. Many large US companies earn substantial revenue overseas, which doesn't appear in US GDP. This biases the ratio upward over time.
• Interest rates. Lower rates justify higher equity multiples — the indicator does not adjust for the cost of capital.
• Public vs private. The mix of public listings versus private ownership has shifted, also pushing the ratio's "fair" level higher.

For these reasons, modern practitioners often compare the indicator to its long-term trend rather than to a fixed 100% line.