# Understanding the Stock Market Cap-to-GDP Ratio: Simplified Guide

![Stock Market Capitalization-to-GDP Ratio](https://www.investopedia.com/thmb/UKb4zMiYM2_yhncucZFmvEkaC1c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-m-market-cap-to-gdp_Final-40e2dec31d644c0d8ddd418a3e7efcbc.png)

*— Investopedia / Ryan Oakley*

## What Is the Stock Market Capitalization-to-GDP Ratio?

The stock market capitalization-to-GDP ratio, also known as the Buffett Indicator, is a measure to assess whether a market is undervalued or overvalued compared to historical standards. This ratio divides the total market cap by the country's GDP, offering insights into market valuation that can guide investment strategies.

### Key Takeaways

*   The stock market capitalization-to-GDP ratio, also known as the Buffett Indicator, helps determine if a market is overvalued or undervalued compared to historical averages.
*   A ratio below 75% suggests a market is undervalued, while a ratio above 115% indicates overvaluation.
*   The calculation divides the total market value of publicly traded stocks by the GDP, often using the Wilshire 5000 for the U.S. market.
*   The ratio's accuracy and implications are debated as it's influenced by economic factors and market trends.

## How to Calculate the Stock Market Capitalization-to-GDP Ratio

﻿ $\begin{aligned} &\text{Market Capitalization to GDP} = \frac{ \text{SMC} }{ \text{GDP} } \times 100 \\ &\textbf{where:} \\ &\text{SMC} = \text{Stock Market Capitalization} \\ &\text{GDP} = \text{Gross Domestic Product} \\ \end{aligned}$﻿

## Insights From the Stock Market Capitalization-to-GDP Ratio

The use of the stock market capitalization-to-GDP ratio increased in prominence after Warren Buffett once commented that it was "probably the best single measure of where valuations stand at any given moment."

It is a measure of the total value of all publicly traded stocks in a market divided by that economy's [gross domestic product](https://www.investopedia.com/terms/g/gdp.asp) (GDP). The ratio compares the value of all stocks at an aggregate level to the value of the country's total output. The result of this calculation is the percentage of GDP that represents stock market value.

To calculate the total value of all publicly traded stocks in the U.S., most analysts use [The Wilshire 5000 Total Market Index](https://www.investopedia.com/terms/w/wilshire5000equityindex.asp), which is an index that represents the value of all stocks in the U.S. markets. The quarterly GDP is used as the denominator in the ratio calculation.

Typically, a result that is greater than 100% is said to show that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. If the valuation ratio falls between 50% and 75%, the market can be said to be modestly undervalued.

Also, the market may be fair valued if the ratio falls between 75% and 90%, and modestly overvalued if it falls within the range of 90% and 115%. In recent years, however, determining what percentage level is accurate in showing undervaluation and overvaluation has been hotly debated, given that the ratio has been trending higher over a long period of time.

The market cap to the global GDP ratio can also be calculated instead of the ratio for a specific market. The World Bank releases data on the _Stock Market Capitalization to GDP for World._

This market cap to GDP ratio is impacted by trends in the [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO) market and the percentage of companies that are publicly traded compared to those that are private. All else being equal, if there was a large increase in the percentage of companies that are public vs. private, the market cap to GDP ratio would go up, even though nothing has changed from a valuation perspective.

## Practical Example: Applying the Stock Market Capitalization-to-GDP Ratio

As a historical example, let's calculate the market cap to the U.S. GDP ratio for the quarter ended September 30, 2017. The total market value of the stock market, as measured by Wilshire 5000, was $26.1 trillion.﻿﻿ U.S. real GDP for the third quarter was recorded as $17.2 trillion.﻿﻿ The market cap to GDP ratio is, therefore:

﻿ $\begin{aligned} &\text{Market Cap to GDP} = \frac{ \$26.1 \text{ trillion} }{ \$17.2 \text{ trillion} } \times 100 = 151.7\% \\ \end{aligned}$﻿

In this case, 151.7% of GDP represents the overall stock market value and indicates it is overvalued.

In 2000, according to statistics at [The World Bank](https://www.investopedia.com/terms/w/worldbank.asp), the market cap to GDP ratio for the U.S. was 153%, again a sign of an overvalued market. With the U.S. market falling sharply after the dotcom bubble burst, this ratio may have some predictive value in signaling peaks in the market.

However, in 2003, the ratio was around 130%, which was still overvalued, but the market went on to produce all-time highs over the next few years. As of 2020, the ratio stands at roughly 150%.

> **Article Sources**
>
> 1.  Fortune. "[Warren Buffett On The Stock Market](https://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm)."
>     
> 2.  The World Bank. "[Market Capitalization of Listed Domestic Companies (% of GDP)](https://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS?end=2019&start=1975&view=chart)."
>     
> 3.  Yahoo! Finance. "[Wilshire 5000 Total Market Inde (W5000](https://finance.yahoo.com/quote/%5EW5000/history?period1=1506643200&period2=1506729600&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true))." Accessed Nov. 12, 2020.
>     
> 4.  Bureau of Economic Analysis. "[Gross Domestic Product: Fourth Quarter and Annual 2017 (Third Estimate) Corporate Profits: Fourth Quarter and Annual 2017](https://www.bea.gov/system/files/2018-03/gdp4q17_3rd.pdf)," Page 8. Accessed Nov. 12, 2020.