Warren Buffett’s recent investment decisions at Berkshire Hathaway have raised eyebrows on Wall Street. In the first three quarters of 2024, the company sold $133 billion worth of stock while only purchasing $6 billion, resulting in a net sale of $127 billion. This unprecedented move, coupled with Berkshire’s record $325 billion in cash and short-term investments, suggests that Buffett and his team are intentionally holding back from making large stock purchases despite having ample funds.
Historical data shows that during years when Berkshire Hathaway was a net seller of stocks, the S&P 500 index typically delivered below-average returns in the subsequent year. The S&P 500’s annual return averaged 11% following years when Berkshire was a net seller, compared to 13% annually since 2010. The current valuation of the S&P 500, which trades at a historically high cyclically adjusted price-to-earnings (CAPE) ratio of 37.9 as of December 2024, further supports Buffett’s cautionary stance.
This figure is significantly above the 20-year average of 27.
Buffett signals caution amid high valuations
When the S&P 500’s CAPE ratio has exceeded 35, the index has declined by an average of 1% during the following year and by an average of 8% during the next three years.
Investors should be cautious in the current market environment, paying attention to stock valuations and maintaining a substantial cash position to provide better resilience and take advantage of potential market downturns. Berkshire Hathaway’s actions, coupled with the high valuation of the S&P 500, suggest that the stock market may deliver below-average or potentially negative returns in 2025. Investors should navigate this period with increased caution and strategic planning.
Despite these short-term concerns, Buffett remains an unabashed optimist who believes in the long-term success of the American economy and stock market. Since World War II, the U.S. economy has navigated through a dozen recessions, and Buffett’s investment strategy is designed to take advantage of lengthy periods of expansion. While Buffett’s recent selling activity and reluctance to repurchase shares might indicate potential trouble for Wall Street in the near term, his long-term outlook for equities remains optimistic.
