Warren Buffett's Amplified Caution to Wall Street Amid S&P 500 Correction

Midday Thursday of last week, the S&P 500 technically entered into a correction, commonly defined as a drawdown of at least 10% from the most recent peak price. With unease brewing among many investors, some may look to seasoned and successful financiers for guidance.

Legendary Berkshire Hathaway (NYSE:BRK-B) CEO Warren Buffett isn’t known to dispense specific stock market guidance. However, actions speak louder than words and if Buffett and Berkshire’s cash hoard is larger than usual, investors may construe this as a warning signal from the Oracle of Omaha.

With Buffett, you’ll get clues and cues rather than direct sell signals for stocks. Nonetheless, between Berkshire Hathaway’s annual letter to shareholders and the company’s most recently released Securities and Exchange Commission (SEC) 13-F filing, traders could surmise Buffett’s cautionary stance and might choose to adjust their own portfolios accordingly.

Is “Nothing” Compelling Now?

Perhaps the best way to gain insight into Buffett’s thoughts on the financial markets is through Berkshire Hathaway’s annual shareholder letter, which is penned by the CEO himself. In the letter released last month, Buffett attempted to quell investors’ concerns while also deploying a phrase that may raise eyebrows — but more on that in a moment.

In the letter, Buffett addressed the widespread chatter about Berkshire’s growing cash or cash-equivalent hoard. “Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won’t change,” he wrote.

Sure, most of Berkshire Hathaway’s investible capital is in stocks and this isn’t likely to change anytime soon. On the other hand, Berkshire’s cash pile is reportedly up to a whopping $334 billion nowadays. So, even if Buffett insists that his company “will never prefer ownership of cash-equivalent assets over the ownership of good businesses” (italics are Buffett’s, not mine), $334 billion worth of dry power sure seems like a defensive stance.

Then, there’s the “nothing compelling” statement that undoubtedly turned more than a few heads. Buffett opined in the shareholder letter, “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.” Why would Buffett feel the need to point out that “nothing looking compelling” if the current market environment offered prime buying opportunities?

Besides, Buffett’s remarks from last year’s Berkshire Hathaway annual shareholder meeting tend to support the cash-over-equities stance. The CEO declared at the meeting, “I don’t mind at all, under current conditions, building the cash position,” adding, “I think when I look at the alternative of what’s available in the equity markets, and I look at the composition of what’s going on in the world, we find it quite attractive.”

A Whole Lot of Selling Going On

Since I’m not a mind reader, I can’t say exactly what Buffett meant by the “composition of what’s going on in the world.” Quite possibly, he was indirectly expressing his uncertainty about international trade frictions, the ongoing war between Russia and Ukraine, and so on.

Alternatively, Buffett’s main concern might be high valuations in certain swaths of U.S. equities, and particularly in the handful of large-cap technology stocks that seem to have propped up the major stock market indexes since the onset of COVID-19. The so-called “Buffett indicator,” which divides the Wilshire 5000 board-market stock index by America’s gross domestic product (GDP), hit 200% not long ago, indicating that stock valuations far outstrip the nation’s output of useful products and services.

It’s debatable whether Buffett actually monitors the indicator that bears his name. What’s beyond debate, though, is that Berkshire Hathaway unloaded a sizable quantity of stock shares in 2024’s fourth quarter.

To put Berkshire’s divestiture pace into perspective, Buffett’s company sold $134 billion worth of stocks on a net basis last year versus just $24 billion in 2023. Notably, Berkshire Hathaway’s stake in Apple (NASDAQ:AAPL), which once stood at 906 million shares, dwindled to 300 million shares by the end of 2024’s final quarter; meanwhile, Berkshire’s position in Bank of America (NYSE:BAC) stock, once valued at $41 billion, now fell below $30 billion.

These moves turned out to be prescient — they don’t call him the Oracle for nothing, obviously. As it turned out, both technology stocks like Apple and financial stocks like Bank of America pulled back after Berkshire Hathaway slashed their stakes.

Why This Matters

Buffett’s take on the equities market is consequential because many investors follow his every move. Just as importantly, Buffett is among the greatest living investors and if he thinks that large-cap stocks are pricey, the risk-to-reward balance of those assets may be off kilter.

Whether Buffett envisions further downside in the coming weeks and months remains a mystery, I’m sorry to say. Berkshire’s next 13-F filing will reveal much, but as always, these filings are ex post facto events.

For the time being, investors will simply have to make do with Berkshire’s required reporting and Buffett’s characteristically vague market commentary. With that and a healthy dose of due diligence, you just might enjoy Buffett-like results even if the tone is defensive as certain stocks look expensive.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.