Buffett’s Moves Signal Caution as Stock Market Soars
Market Gains Fuel New Highs
The U.S. stock market has experienced remarkable growth over the last couple of years. From the end of 2022 to the end of 2024, the benchmark S&P 500 (SNPINDEX: ^GSPC) index jumped by 53%. This surge is largely attributed to excitement surrounding artificial intelligence and interest rate cuts.
Investing in the S&P 500 on days when it reaches new highs historically yields slightly above-average returns over the following year, according to JPMorgan Chase research.
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Buffett’s Strategy Raises Eyebrows
The impressive rise of the S&P 500 has led many stocks to trade at very high valuations. Notably, Warren Buffett, America’s famed value investor, has been selling significant stock holdings, which may prompt investors to reconsider buying exchange-traded funds that follow the benchmark index. The holding company he leads, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has reduced its overall stock value by 23% to $271.7 billion in just the first nine months of 2024.
This year, Buffett sold over 605 million shares of Apple, cutting his stake in the tech giant by more than two-thirds. He has also reduced his investments in Snowflake, Paramount Global, and HP.
Investors are increasingly speculating that Buffett is having trouble finding attractively priced stocks as the current bull market continues. The average stock in the S&P 500 is currently trading at 24.7 times trailing earnings, a historically high level that deepens concerns of a potential downturn.
Buffett has often pointed to the ratio of U.S. stock market capitalization relative to the country’s gross domestic product (GDP) as a gauge for market valuations. This ratio, known as the Buffett Indicator, is now in what many see as dangerous territory.
The Buffett Indicator reached approximately 195% at the start of 2022. By the end of 2022, the S&P 500 index had dropped by 20%. Today, total market capitalizations are over 205% of the recent GDP figures.
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Preparing for Future Opportunities
Buffett bought control of Berkshire Hathaway in 1965 at approximately $14.86 per share. Currently, the A-class shares are valued around $469,000, reflecting an average annual gain of about 19.2% over nearly six decades.
To achieve similar success in investing, one must recognize that the price paid for a stock is critical to its potential return. Buffett tends to hold cash during periods of growth, positioning himself to take advantage of opportunities during market declines.
Currently, Berkshire Hathaway’s cash reserves and short-term Treasury Bills surged a staggering 96% over the first nine months of 2024, totaling approximately $320.3 billion. This capital could be deployed to seize bargains when the market dips.
Despite recent stock sales, Buffett is still making purchases, including new investments in Chubb Limited, Domino’s Pizza, and Pool Corp. in the same period.
Investors should view Buffett’s stock selling in 2024 with caution but not as a reason to shy away from the market entirely. While he manages a $1 trillion corporation, individual investors should not let broad market valuations deter them from considering stocks that seem like good buys right now.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Domino’s Pizza, and JPMorgan Chase. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
