By Joy Yang March 19, 2025

The Buffett Indicator, which calculates the ratio of the market capitalization (MC) of a country’s publicly traded stocks to it’s gross domestic product (GDP) can provide a high level view of a country’s valuation. In 2001, Fortune published an article on the Buffett Indicator where he remarked: 

“If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire,"  

[Warren Buffet]

Interpretation

MCs are forward looking and price in future expected economic value; GDPs are backward looking and value the most recent actual economic activity. The ratio of MC to GDP can provide insight into whether a market is over or undervalued. Similar to Price to Earnings ratios of a specific stock, we can use it to understand relative performance across countries and to itself.

  • Ratios below 100 (%) or below a country’s historical average generally considered undervalued, suggesting potential investment opportunities 
  • Ratios above 100 (%) or above a county’s historical average viewed as overvalued, which could signal lower future returns or market correcti

Currently, the US market is at its historic high since 2000 and China is below its historic median since 2000.

 

Exhibit 1: MC to GDP Ratio (%) - Current and Range 2000-2025

Source: MarketVector, International Monetary Fund (GDP 2025 estimates in USD), World Federation of Exchanges (MarketCap January 2025 in USD), World Economic Forum (HO-LO range 2000-2022). Data as of March 2025.

 

Usefulness and Limitations

While the Buffett Indicator provides a high-level view of market valuation, it has certain limitations:

  • Globalization: diversified companies generate substantial revenues from international operations which may not be reflected in domestic GDP, skewing the ratio for countries with large multinational companies.
  • Economic Structure: differences in economic structures and the proportion of publicly listed to private companies can affect the indicator’s trend and comparability.
  • Interest Rates: the indicator does not account for interest rates and only considers the value of the stock market, without considering how stocks are valued relative to alternative capital, such as bonds.

 

Staying invested: Finding Value between Market Extremes

While the US looks expensive, the aggregate World MC/GDP ratio is close to it’s long term average since 2000, indicating that there are other parts of the world that might look cheap. China is one country below it’s average and lower than the rest of the world; india is one country above it’s average and higher than the restor of the world. Comparing BlueStar® China Internet Software Index (BCHNQ) to MVIS® Digital India Index (MVDIND), we can see that BCHNQ has outperformed MVDIND over the last year  (since March 16, 2024). This resurgence signals renewed investor interest, placing China back on the opportunity radar as a potential value play in global markets.

 

Exhibit 2: Cumulative Performance – Last One Year (3/16/2024-3/17/2025)

Source: MarketVector. Data as of March 18, 2025.

 

For more information on MarketVector Indexes, visit www.marketvector.com.

 

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About the Author:

Joy Yang is the Global Head of Index Product Management at MarketVectorTM Indexes. She is responsible for managing MarketVector index products and services to accelerate innovation in financial index design and adoption. Joy brings more than 25 years of investment experience to MarketVector, having led teams delivering index and quantitative-active investment solutions at Arabesque Asset Management, Dimensional Fund Advisors, Vanguard, Aberdeen Standard Investments, AXA Rosenberg, and Blackrock. Joy has an MBA from the University of Chicago Booth School of Business and a BS in Electrical Engineering from Cooper Union’s Albert Nerken School of Engineering.

 

For informational and advertising purposes only. The views and opinions expressed are those of the authors but not necessarily those of MarketVector Indexes GmbH. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, that do not reflect actual results. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. MarketVector Indexes GmbH does not sponsor, endorse, sell, promote, or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. The inclusion of a security within an index is not a recommendation by MarketVector Indexes GmbH to buy, sell, or hold such security, nor is it considered to be investment advice.

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