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Intermediate · Lesson 4 of 5

Market valuation gauges: Buffett indicator and CAPE

7 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

The Buffett indicator divides total stock market value by GDP. Warren Buffett called it "probably the best single measure of where valuations stand at any given moment" in a 2001 Fortune article. High readings have often been followed by lower long-term returns, though the ratio has trended up over decades.

The Shiller CAPE (cyclically adjusted P/E) divides price by the average of 10 years of inflation-adjusted earnings. It smooths out the business cycle. High CAPE has historically been associated with lower 10-year returns, but it is a poor short-term timing tool: markets can stay expensive for years.

Use valuation gauges to set expectations and tilt gently, not to jump in and out of the market. Vestora's Big picture screen tracks the Buffett indicator.

Key takeaways

  • Buffett indicator = market cap / GDP.
  • CAPE = price / 10-year average real earnings.
  • Good for long-term expectations, poor for short-term timing.

Check your understanding

1. CAPE uses earnings averaged over...

  • 1 year
  • 5 years
  • 10 years
  • 30 years
Show the answer

10 years. Ten years of inflation-adjusted earnings.

2. High market valuation gauges have historically been associated with...

  • Higher next-month returns
  • Lower long-term returns
  • No relationship at all
  • Guaranteed crashes
Show the answer

Lower long-term returns. The link is with long horizons, not short-term timing.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.