Buffett Indicator
US Total Stock Market Capitalization / Gross Domestic Product
Buffett Indicator = Wilshire 5000 Total Market Cap / GDP — Source: FRED / Federal Reserve Z.1In 2001, Warren Buffett called this "probably the best single measure of where valuations stand at any given moment." The logic is straightforward: over the long run, corporate profits can't grow faster than the overall economy indefinitely — so when investors are paying $2 for every $1 the economy produces, they're making a very optimistic bet. When this ratio was at 133% in 2001, stocks subsequently lost roughly half their value. It doesn't tell you when the correction comes. It tells you the price you're paying for American business.
Shiller CAPE Ratio
Cyclically Adjusted Price-to-Earnings Ratio
CAPE = Real S&P 500 Price / 10-Year Average Real Earnings — Source: Robert Shiller / YaleA price-to-earnings ratio smoothed over 10 years of inflation-adjusted earnings, developed by Nobel laureate Robert Shiller. The 10-year average is the key insight — a single year's earnings can be wildly distorted by recessions or one-time booms, making a standard P/E nearly useless at market extremes. The long-run average is about 17x. At the dot-com peak in early 2000, CAPE reached 44x — stocks then lost roughly half their value over the next two years. It has never stayed above 30x for long without a reckoning following.
Fed Model
Earnings Yield vs. 10-Year Treasury Yield
Spread = Earnings Yield (1 / CAPE × 100) − 10Y Treasury Yield — Source: Robert Shiller / YaleThis compares what the stock market earns — expressed as a yield — against what the US government pays you to lend it money for 10 years. When stocks yield more than bonds, you're being paid to take on equity risk. When bonds yield more, you need a compelling reason to own stocks instead of Treasuries. A deeply negative spread means the risk-free rate has taken back a job it hasn't held in decades. Interest rates are to asset prices what gravity is to the apple.
Corporate Profits / GDP
After-Tax Corporate Profits as a Share of the Economy
Profit Margin = After-Tax Corporate Profits (SAAR) / GDP (SAAR) — Source: FRED / BEAAfter-tax corporate profits as a share of the entire US economy. Margins mean-revert — they always have, and for an iron reason: high profits attract competition, give labor negotiating leverage, and draw regulatory attention. The historical average is around 6–7% of GDP. When profits are running near 12%, you're betting that something unprecedented will persist. As Charlie Munger put it: "Show me the incentive and I'll show you the outcome." Record margins are a very large incentive for every competitor on earth to take a run at them.