So if GDP is concerned with the top line over a definite time period and stock markets with the bottom line over an infinite period, why compare the two? GDP is a flow variable, market capitalization a stock variable.
Further, while market capitalization is influenced by earnings, GDP corresponds to the annual turnover of the companies.
While GDP is constrained by a time metric - one year - market capitalization is effectively looking to infinity. Given these definitions, there are some differences between what the numerator and the denominator are measuring. So hypothetically, if every economic activity in the country were corporatized, GDP would basically reflect the aggregate annual turnover of all the companies. GDP, meanwhile, is the monetary value of all final goods and services produced in a country in a given period of time, usually a year. Thus, a country’s stock market capitalization is the aggregate of the present value of all the combined future earnings of all its listed stocks. Valuation 101 teaches that a stock’s price is the present value of all its future earnings and cash flows.
Simply put, the so-called Buffett Indicator measures the total value of all publicly traded stocks in a market divided by that economy’s GDP.
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