The Buffett Indicator, named after Warren Buffett, measures market valuation by dividing a country’s total stock market value by its GDP. A ratio of 100% suggests fair market. For example, if stocks are worth $50 trillion and GDP is $25 trillion, a 200% ratio would suggest the market is overvalued.
It was proposed as a metric by Buffett in 2001, who called it ‘probably the best single measure of where valuations stand at any given moment,’ and its modern form compares the capitalization of the US Wilshire 5000 index to US GDP. It is widely followed by the financial media as a valuation measure for the US market in both its absolute, and de-trended forms. The indicator set an all-time high during the so-called ‘everything bubble,’ crossing the 200% level in February 2021; a level that Buffett warned if crossed, was ‘playing with fire.’
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The Daily Omnivore 