The Buffett Indicator

and how can we make a more useful reading out of it

Today's U.S. Market Cap to GDP ratio Chart

The Warren Buffett Stock Market Indicator Overview

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The Buffett indicator is a simple formula that divides the U.S. Market Cap by its quarterly GDP output. This valuation graph tool is potentially helpful to discern yearly stock performance probabilities. The Market Cap to GDP ratio was named the "Buffett Indicator" because it is one of the famous investors' favorite tools.

The Wilshire 5000 Total Market Index is usually the preferred data set used as the Market Cap value. The other method that would return similar results is to use the Fed's Corporate Equity data. Still, it lacks shorter-term insights since it is published quarterly.

The basic Market Cap to GDP indicator can give a general portrait of current market valuations. It offers as well a very nice macro view of general investor sentiment. However, the indicator lacks in integrating certain business conditions like a low or high-interest rate environment. Therefore, it often has severe limitations in predicting massive bullish or bearish market movements that are highly impacted by interest rate levels.

Adjusted Buffett Indicator

This version of the Buffett stock market indicator takes into account the growing exposure of SP500 companies to outside of U.S. markets.

See also: The Shiller PE Ratio and our unique U.S. stock market valuation chart.