Are U.S. stocks expensive?

The U.S. stock market has been in a long-term expansion since 2009, fueled by technologies such as social media, smartphones and, most recently, artificial intelligence. Attracting huge flows of global capital, the United States now accounts for over 60% of total world market capitalization. Investors in the U.S. market are paying more for a dollar of earnings than they were 10 or 20 years ago. This has led some investors to question whether U.S. stocks have become expensive, particularly in relation to expected earnings.

Why does this matter? The last time U.S. stocks became very expensive was in the technology boom of the late 1990s. This boom was followed by a “lost decade” for the U.S. stock market, in which the annualized return of the S&P 500 was negative for the entire decade of the 2000s. Getting a handle on the valuation of the U.S. stock market — whether cheap, expensive or fairly valued — can be helpful for investors to manage expectations and risks.

In this article, we explain 2 ways to value the U.S. stock market: the Buffett indicator and the Shiller Cyclically Adjusted Price-to-Earnings Ratio (CAPE ratio). We then outline 2 ways to think about exposure to U.S. equity: global and U.S. diversification.

When valuing the U.S. stock market, we’re not looking at the next quarter or even the next year but typically the next 10 years or even longer. With this time horizon in mind, we highlight 2 valuation measures: the Buffett indicator and the Shiller CAPE ratio.

The Buffett indicator is named after Warren Buffett, the famous investor who has headed Berkshire Hathaway since 1965.

The Shiller CAPE ratio is named after Robert Shiller, Professor of Economics at Yale University. Shiller co-developed the Case-Shiller housing price index, authored the book Irrational Exuberance and jointly received the 2013 Nobel Prize in Economic Sciences for his contributions to the “empirical analysis of asset prices”.

The Buffett indicator

The Buffett indicator measures whether the stock market is overvalued or undervalued relative to the output of the economy. It divides the total market capitalization of a country's publicly traded stocks by its Gross Domestic Product (GDP).¹

Buffett indicator = (Total stock market capitalization ÷ Gross Domestic Product) × 100

Buffett’s insight is that, over the long term, stock market valuation should be anchored by economic output. A normal level for the indicator is about 100%, where stock market capitalization is about the same as economic output.

As Buffett observed about investing for the long term, “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.”²

The following table gives approximate ranges for the Buffett indicator, based on market conditions since 1975.

The Shiller CAPE ratio

While the Buffett indicator compares the stock market to economic output, the Shiller CAPE ratio gives a price-to-earnings (P/E) ratio for the stock market.⁴ The Shiller CAPE ratio divides the stock market’s price by its 10-year average of inflation-adjusted earnings.

Shiller CAPE ratio = Price per share of market ÷ Earnings per share of market over last 10 years, inflation-adjusted

How is this different from the traditional P/E ratio?

• The traditional P/E ratio measures price to earnings over the last year, where earnings are before inflation.
• The Shiller CAPE ratio measures price to earnings over the last 10 years, where earnings are after inflation.

The Shiller CAPE ratio is based on 10 years to capture the trend of a stock market’s earnings over a full business cycle, since a business cycle is typically less than 10 years. As a result, it smooths out short-term fluctuations in earnings over a few quarters or years.

Over the 50-year period from 1975 to 2024, the average Shiller CAPE ratio of the U.S. stock market was 22.05. This means that an investor paid $22.05 for each dollar of inflation-adjusted earnings. The average and peak levels have increased over time. As an example, the ratio was at 32.56 in September 1929, just before the monumental Wall Street crash and the Great Depression of the 1930s. Fast forward to the end of the century and the ratio was at 44.20 in December 1999, just before the dot-com crash and the “lost decade” of the 2000s.⁵

The following table gives approximate ranges for the Shiller CAPE ratio, based on market conditions since 1975.

Once investors have formed an opinion on whether the U.S. stock market is cheap, expensive or fairly valued, they can think about their U.S. exposure. In this section, we use the concept of “valuation exposure”. Imagine this example:

• Investor A allocates their entire equity portfolio to one of the most expensive stock markets in the world.
• Investor B allocates their equity portfolio to a variety of stock markets, including some that are expensive, cheap and fairly valued.

In this example, Investor A has a high level of valuation exposure, while Investor B has a moderate level of valuation exposure. With this concept in mind, we outline 2 ways to think about valuation exposure to U.S. equity: global and U.S. diversification.

U.S. diversification

Investors can also review how they diversify their U.S. equity position. When valuations increase significantly for extended periods, like during the tech boom of 1995 to 2000, U.S. market gains are driven by large-cap growth stocks. These are represented by popular market-cap weighted indexes, such as the S&P 500 or the Nasdaq 100. In the ensuing “lost decade” of the 2000s, large-cap growth was completely unrewarded. However, other parts of the U.S. market held up reasonably well, including small-cap value, dividend appreciation and defensive sectors such as consumer staples, health care and utilities. This serves as a reminder that there is more to the U.S. stock market than large-cap growth.

The U.S. stock market has been in a long-term expansion since 2009. Global demand for U.S. equities has increased U.S. market valuations. High valuations, like those of 1929 and 1999, bring the risk of lower future returns for extended periods.

Are U.S. stocks expensive? To answer this question, investors can consider the valuation of the U.S. stock market, along with their U.S. exposure.

Two ways to measure the long-term valuation of the U.S. stock market are the Buffett indicator and the Shiller CAPE ratio.

• The Buffett indicator divides total stock market capitalization by GDP. A normal level is about 100%, where stock market valuation and economic output are about the same. Buffett warned that as the indicator approaches 200%, investors are “playing with fire”. As of March 31, 2025, the Buffett indicator was 189%.
• The Shiller CAPE ratio divides the stock market’s price by its earnings, where earnings are inflation-adjusted over the last 10 years. A normal level is in the low 20s. The ratio was above 30 before the Wall Street crash of 1929 and above 40 before the tech crash of 2000–2002. As of March 31, 2025, the Shiller CAPE ratio was about 35.

Two ways for investors to think about U.S. exposure are global and U.S. diversification.

• Global diversification: Is your global equity exposure mostly in one expensive market or do you have exposure to a range of markets with different valuations?
• U.S. diversification: Is your U.S. equity exposure mostly in large-cap growth or do you have exposure to other parts of the market?