What Does the Buffett Indicator Tell Us About U.S. Equity Valuations?

January 20, 2017 | Ryan Marks, CAIA, Senior Client Analyst, Assistant Vice President

As markets continue to reach new all time highs many investors are wondering how much more runway is left for the current 8-year bull market. While different valuation metrics will tell different stories, it can be helpful to look at what Warren Buffett has dubbed the single best measure of long term market valuations.

For this week’s chart of the week we take a look at the “Buffett Indicator” which consists of the Wilshire 5000 index market cap divided by the quarterly nominal GDP of the U.S. Economy. As of the third quarter, the reading stood at 121%, just below its two decade high and 45 year two standard deviation average. These readings would suggest that the market is overbought. However, there is no perfect market indicator, so while the Buffett Indicator can be used as a sign of caution to investors who are considering committing further funds to U.S. Equities, it should not be relied upon as an exclusive predictor of future market returns. Although the Buffett Indicator suggests that valuation levels are high, positive earnings growth began to emerge in late 2016 and could provide further support for current valuations if companies can deliver on profit projections. These statistics will be watched closely as the year unfolds to gauge future direction of the U.S. equity market.

Ryan Marks, CAIA
Senior Client Analyst, Assistant Vice President

Get to Know Ryan

Related Content

The Evolution of Private Credit chart

07.10.2019

The Evolution of Private Credit

With roughly $48B of U.S. private credit fundraising taking place in 2018 ­­— surpassing 2008 levels of $42B — private…

07.09.2019

2019 Halftime Market Briefing

Live Webinar – Thursday, July 18, 2019 – 1:00-2:00 PM CT

Russell Indices Incorporate Uber Exciting IPOs

06.27.2019

Russell Indices Incorporate “Uber” Exciting IPOs

It’s that time of year again! The end of June brings longer summer days and the annual Russell index reconstitution….

Are Americans Swimming in Debt Again? bar chart

06.19.2019

Are Americans Swimming in Debt Again?

The eleven-year recovery since the 2008 financial crisis has been good for most Americans, allowing many to…

06.14.2019

Bank Loans Position Paper

Bank loans represent a key strategic asset class for most institutional investors’ fixed income portfolios. Some of the critical benefits…

When the Experts Are Wrong chart

06.13.2019

When the Experts Are Wrong

Since the end of October, the yield on the 10-year Treasury fell more than 1% and as of writing stands…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >