Warren Buffett Sends a $150 Billion Warning to Stock Investors as the S&P 500 Races Past Record Highs

The stock market is headed into the final month of a banner year. The benchmark S&P 500 (^GSPC 0.05%) has advanced 27% in 2024, putting the index on pace for one of its best performances of the 21st century. Indeed, the S&P 500 has raced past more than four dozen record highs year to date amid excitement about artificial intelligence and interest rate cuts, and it closed at a fresh high on Dec. 2.

Investors must now answer a difficult question: Is it smart to buy stocks with the S&P 500 at its record high? On one hand, the market has historically performed well from highs. From January 1970 to December 2023, the S&P 500 returned an average 9.4% during the 12 months following a record close, but it returned just 9% annually during the entire period, according to JPMorgan Chase strategist Madison Faller.

On the other hand, the tremendous run-up in the S&P 500 has left many stocks trading at historically rich valuations, and Warren Buffett recently sent investors a $150 billion warning. Here are the important details.

Warren Buffett has a $150 billion warning for investors

Warren Buffett is regarded as one of the world’s foremost investors. Under his leadership, Berkshire Hathaway (BRK.A -1.43%) (BRK.B -1.50%) has seen its Class A shares increase at 20% annually since the mid-1960s, compounding twice as fast as the S&P 500. Numerous acquisitions and stock purchases engineered by Buffett contributed to that upside, including positions in Coca-Cola and American Express bought for pennies on the dollar.

Today, Buffett runs the vast majority of Berkshire Hathaway’s $300 billion stock portfolio, and recent capital allocation decisions can be interpreted as a grim warning for investors. Specifically, Berkshire has been a net seller of stocks in the last seven quarters, and the cumulative net sales during that period exceeded $150 billion. The logical conclusion: Buffett is struggling to find reasonably priced stocks after the market’s run-up.

The S&P 500 trades at 22 times forward earnings, a premium to the five-year average of 19.6 times forward earnings and near the highest valuation since April 2021, according to FactSet Research. High forward P/E ratios correlate strongly with poor performance over long periods, and the current multiple implies an annual return of just 3% over the next three years, says Chief Economist Torsten Slok at Apollo Global Management.

Putting Warren Buffett’s $150 billion warning in context

Investors should put Buffett’s recent capital allocation decisions in context. Namely, Berkshire is worth $1 trillion, so buying stock in small companies would hardly move the needle. Beyond that, Buffett has admitted to avoiding technology stocks because he doesn’t understand the sector. Taken together, those restrictions leave Berkshire with limited investment options.

Buffett highlighted that problem in his latest shareholder letter. “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” he wrote. Buffett also discussed international stocks in his analysis. “Outside the U.S., there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.”

Here is the big picture: Many stocks are historically expensive, so compelling investment options have become increasingly difficult to find. Berkshire being a net seller of stocks in the last seven quarters is proof of that. But retail investors have more opportunities to deploy capital than a trillion-dollar company like Berkshire.

So, Warren Buffett’s $150 billion warning should not be viewed as a mandate to avoid the market, but rather as a reminder that valuations always (eventually) matter. In that context, the current environment undoubtedly warrants caution. The slightest bump in the economic or political landscape could send the S&P 500 into a correction or bear market. But I think it would be a mistake to avoid the market entirely right now.

I’ll close with this quote from legendary investor Peter Lynch. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”