The Buffett Indicator
Buffett Indicator = Total Market Capitalization ÷ GDP
Current calculation:
$62.8 trillion ÷ $28 trillion = 2.24
This compares what investors pay for all US companies (market cap) to what the economy actually produces (GDP).
To understand what this ratio means, we need to understand its two components.
Part 1: What Is Market Capitalization?
The Calculation
Market cap is the total value of all publicly traded US companies.
For any single company:
Market Cap = Stock Price × Shares Outstanding
Example: Nvidia
- Stock price: $181.10
- Shares outstanding: 24.4 billion
- Market cap: $181.10 × 24.4B = $4.41 trillion
Total US Market Cap
Do this for all 6,062 US public companies and add them up:
Total = $62.8 trillion
This is what investors are currently paying for ownership of all US public companies.
Part 2: What Is GDP?
The Definition
GDP (Gross Domestic Product) measures the total value of all final goods and services produced in the US economy in one year.
Current US GDP: $28 trillion
What GDP Counts
Included:
- $50,000 car sold to customer ✓
- $200 doctor visit ✓
- $1,500 monthly rent ✓
- $300 billion defense spending ✓
Not included:
- Used car resale ✗ (not new production)
- Home value appreciation ✗ (no transaction)
- Unpaid housework/volunteering ✗
The Breakdown
GDP = Consumer Spending + Business Investment + Government Spending + Net Exports
- Consumer spending: $19T (68%)
- Business investment: $5T (18%)
- Government spending: $5T (18%)
- Net exports: -$1T (-4%)
Total: $28 trillion
Part 3: What the Ratio Means
$62.8T ÷ $28T = 2.24
For every dollar the US economy produces annually, investors are paying $2.24 for stocks.
Part 4: Historical Context
Historical Ranges
Below 0.8 = Undervalued
Last occurred: March 2009 (ratio: 0.56)
0.8-1.2 = Fair Value
Common 1970s-1990s average: ~0.9
Above 1.5 = Overvalued
Forward returns historically low
Above 2.0 = Extreme Overvaluation
Rare—occurred only at major market peaks
The Three Major Peaks
1. Dot-Com Bubble (March 2000)
- Ratio: 2.0
- Result: S&P 500 fell 49% over next 2.5 years
- Bottomed at ratio of 0.77 (October 2002)
2. Financial Crisis (October 2007)
- Ratio: 1.8
- Result: S&P 500 fell 57% over next 1.5 years
- Bottomed at ratio of 0.56 (March 2009)
3. COVID/Tech Bubble (Late 2021)
- Ratio: ~2.1
- Result: S&P 500 fell 25% in 2022
- Bottomed at ratio of 1.8 (October 2022)
4. Today (October 2025)
- Ratio: 2.24
- Higher than 2000 and 2007 peaks
- What happens next: ?
The Pattern
Every time the ratio has approached or exceeded 2.0, a significant market correction followed.
Current: 2.24 (October 22, 2025) = 149% above historical average of 0.9
