Macro RG × Buffett Indicator — Correlation
How closely do the Shiller CAPE-based Macro RG and the US Buffett Indicator (market cap / GDP) move together — and where do they diverge?
1. Core Finding
A Pearson correlation of 0.916 means the two metrics move in the same direction roughly 84% of the time (R²). They share the same macro drivers — interest rate cycles, economic expansions, and risk appetite — but measure different dimensions of the same phenomenon.
What each captures: Macro RG (CAPE/10) reflects how expensive corporate earnings are relative to a smoothed 10-year baseline. The Buffett Indicator reflects how large the equity market has grown relative to the total economy. High correlation means both signal excess simultaneously — but the magnitude and timing of their movements differ, and that divergence carries information.
2. Historical Comparison (1975–2024)
Annual series. Left axis: M(S&P 500)RG10 = CAPE ÷ 10. Right axis: US Buffett Indicator (%). Dashed lines = overlap-period averages.
CAPE source: Robert Shiller / Yale (December monthly reading used for annual alignment). Buffett Indicator source: World Bank — CM.MKT.LCAP.GD.ZS.
3. Why They Correlate — and What Each Adds
- — Interest rates. Lower rates raise equity valuations (CAPE rises) and expand market cap relative to GDP (Buffett rises). Simultaneously.
- — Economic expansions. GDP growth and corporate earnings growth tend to coincide, pulling both metrics in the same direction.
- — Risk appetite. Bull markets compress risk premia, pushing up both the earnings multiple (CAPE) and the overall market-to-economy ratio.
- — Macro RG / CAPE. Earnings-cycle valuation. Smooths over a full business cycle, detecting whether prices are expensive relative to long-run earnings capacity.
- — Buffett Indicator. Structural concentration. How large is the listed equity sector relative to the whole economy? Captures financialization — the growing share of GDP represented by listed corporations.
- — The gap between them signals whether earnings are expensive (CAPE problem) or whether markets have simply grown larger than the economy can justify (structural problem).
4. Key Historical Episodes
Periods where the two metrics converged, diverged, or gave conflicting signals.
| Period | Episode | RG10 | Buffett | Key observation |
|---|---|---|---|---|
| 1975–1994 | Structurally cheap era | 0.9–2.0 | 37–71% | Both metrics far below today. Buffett Indicator below 100% every year; CAPE at or below long-run average. |
| 1995–2000 | Tech-boom surge | 2.5→4.4 | 91→153% | Synchronized explosion upward. CAPE peaked at 44.2 (Dec 1999). Buffett hit 153% — first time above 100%. |
| 2001–2002 | Dot-com unwind | 3.1→2.3 | 132→101% | Both deflated together but remained elevated. CAPE slow to fall because earnings had already been inflated. |
| 2008 | Financial crisis | 1.5 | 79% | Buffett crashed 43% in one year (equity value wiped out). CAPE fell less — earnings lag effect. |
| 2009 | Post-crisis recovery | 2.0 | 104% | Buffett recovered +32% as markets rebounded before earnings. Divergence: Buffett surged, CAPE lagged. |
| 2020–2021 | COVID-era expansion | 3.4→3.8 | 197→208% | Both at historic highs. Buffett disproportionate: fiscal stimulus expanded GDP slowly, equities exploded. |
| 2024 | Current: new all-time high | 4.13 | 216.3% | Buffett at all-time high (216.3%). CAPE/10 at 4.13× — elevated but below 2000 peak (4.42×). Structural divergence: equities now 216.3% of GDP, never seen before. |
5. Current Reading (2026-06 / 2024)
The divergence in extremity matters. CAPE is elevated but not at 2000 bubble levels. The Buffett Indicator is at a genuine all-time high with no historical precedent in 50 years of data. This asymmetry suggests the excess is partly structural — equities have grown as a share of the economy beyond what earnings multiples alone would imply.
One explanation: the post-2010 era combined zero-rate policy (which expands CAPE) with tech-sector concentration and share buybacks (which expand market cap without proportional GDP growth). The result is a Buffett Indicator that has drifted structurally higher even as CAPE periodically corrected.
6. Limitations
CAPE source: Robert Shiller, Yale University — ie_data.xls, monthly series 1881–present. Buffett Indicator source: World Bank Open Data — CM.MKT.LCAP.GD.ZS, annual 1975–2024. Correlation computed on 50 aligned annual observations (December CAPE/10 vs. annual Buffett). For research purposes only. Not investment advice.