Warren Buffett’s Berkshire Hathaway sold $133 billion in stocks in the first three quarters of 2024, while only buying $6 billion worth. This made the company a net seller of $127 billion, an unprecedented move for Berkshire. The warning is particularly concerning because the company held a record $325 billion in cash and short-term investments at the end of the third quarter, indicating that Buffett and his team had the means to make substantial purchases but chose not to.
Since 2010, when Berkshire Hathaway has been a net seller of stocks during a year, the S&P 500 has returned an average of 11% during the following 12-month period, compared to its 13% annual return since 2010. This suggests that the S&P 500 typically generates below-average returns during the year after Berkshire was a net seller of stocks. Given Berkshire’s recent historic selloff, this trend implies a below-average return in 2025.
Below-average S&P 500 returns ahead
Buffett’s massive selloff aligns with another significant stock market concern: the high valuation of the S&P 500. The index achieved a Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 37.9 in December 2024, significantly higher than its 20-year average of 27.
Historically, when the S&P 500’s monthly CAPE ratio has exceeded 35, the index has declined by an average of 1% over the next year and by an average of 8% over the next three years. Based on these signals, investors should be cautious in the current market environment. Paying close attention to valuations when buying stocks is crucial.
Additionally, now may be a good time to build an above-average cash position, which will make it easier to capitalize on the next market drawdown. Investors are advised to heed Warren Buffett’s warning and remain vigilant about market conditions in the coming year.
