Buffett Indicator

The Buffett Indicator divides the total market capitalization of a country's stock market by its GDP, gauging how large equity valuations have grown relative to the economy beneath them. For the US, the numerator is typically the Wilshire 5000 total market index; Warren Buffett called the ratio "probably the best single measure of where valuations stand at any given moment" in a 2001 Fortune article.

The historical markers: the ratio sat near 140% at the 2000 dot-com peak before the crash, and in the same article Buffett suggested buying near 70-80% tends to work well while approaching 200% is "playing with fire." US readings crossed 200% in 2021 and have spent much of the 2020s at levels that would have screamed sell under the 20th-century calibration — which is the indicator's core problem.

The comparison has drifted structurally. US-listed companies earn a far larger share of profits abroad than in 1980 (GDP does not capture foreign earnings), corporate margins are structurally higher, and rate regimes reset what any valuation multiple should be. Like the Shiller P/E, it frames the decade's return math without timing anything inside it.