Warren Buffett Just Issued His Most Daunting Warning to Wall Street Yet. It Couldn't Be Any Clearer

Each quarter, investors anxiously await the release of Berkshire Hathaway’s (BRK.A -0.27%) (BRK.B -0.24%) 13F filing. The Securities and Exchange Commission (SEC) requires most large funds to disclose what stocks they owned at the end of each quarter. This effectively allows the public to see which stocks funds are buying and selling.

Many investors keep a close eye on Berkshire Hathaway’s 13F filing since the conglomerate is run by none other than Warren Buffett, arguably the greatest investor ever. Buffett and Berkshire’s holdings not only offer a glimpse into what companies they like but also how some of the greatest investing minds are thinking.

In Berkshire’s latest 13F, Buffett made a tumultuous warning to Wall Street about the stock market. It couldn’t be any clearer.

Forget about the broader market

There’s no shortage of investors who think the market is overvalued. After all, we’ve been in a two-plus-year bull market, and the broader benchmark S&P 500 has logged back-to-back annual returns of more than 20%. Buffett appears to be one of these investors. In 2024, Buffett and Berkshire hoarded cash and had over $320 billion of cash and short-term Treasury bills at the end of the third quarter.

Berkshire also sold more stocks than it bought in 2024, including big chunks of some of its largest positions like Apple and Bank of America. If you’re an investor who studies Buffett and Berkshire, you know they have a knack for weathering recessions and severe market downturns. Some attribute this great timing to why Berkshire’s stock has crushed the stock market for decades.

In Berkshire’s recent 13F, the Oracle of Omaha made a tumultuous warning to Wall Street. Berkshire exited two exchange-traded funds (ETFs) that track the broader market: the SPDR S&P 500 ETF (SPY -0.72%) and the Vanguard S&P 500 ETF (VOO -0.69%).

Now, when someone sells a stock, it doesn’t necessarily mean that company is in a bad place. Perhaps the insider needed the cash to make a large purchase. However, in this scenario, we know Berkshire doesn’t need the cash given its massive stockpile. It couldn’t be any more clear that Buffett and the team at Berkshire think the market is overvalued. Berkshire purchased both of these ETFs at the end of 2019, and this is the first time it changed either position in over five years.

This isn’t too surprising, given that several indicators have suggested the market is either overvalued or the economy could soon tip into a recession. A few examples include the inverted yield curve and the Shiller CAPE ratio, which compares the price of the S&P 500 to its 10-year average inflation-adjusted earnings to smooth out irregularities. As you can see below, the CAPE ratio trades above its five-year average and near highs seen right before the market sold off intensely in 2022 (as of Feb. 16).

S&P 500 Shiller CAPE Ratio data by YCharts.

Is this time different, or does Buffett know best?

It’s rare to see the cause of a recession or market meltdown repeat itself. That doesn’t mean there won’t be similarities, but they’re often dressed differently and hard to detect before they happen. History can offer clues that help investors prepare for the future, but history doesn’t usually repeat itself exactly.

The market is in a very different place today than ever before. Congress flooded the economy with cash following the onset of the pandemic in 2020; a handful of companies currently consume about a third of the S&P 500; and technology has ingratiated itself in our daily lives like never before.

That said, Buffett and Berkshire have been navigating the market since the 1960s, so they’ve seen plenty of different cycles. While conditions are different, they could be masking similar issues that have led to a market downturn. I would heed Buffett’s warning and avoid entering new positions if they trade at expensive valuations. You don’t necessarily need to sell or change your entire portfolio if you have a long-term investing horizon, but you should prepare for some volatility and perhaps a correction, even if short-lived.