Warren Buffett’s Caution: A Closer Look at Current Market Valuations

When Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) eminent CEO speaks, Wall Street listens closely. Warren Buffett’s track record in his 60 years at the helm has seen his company outperform the S&P 500 (SNPINDEX: ^GSPC) significantly. His leadership has led to a staggering cumulative gain in Berkshire’s Class A shares (BRK.A) of 6,076,172% as of February 24.

Investors often seek insights from Buffett through various methods. Quarterly filings known as Form 13Fs reveal the stocks Buffett and his top advisors, Todd Combs and Ted Weschler, are buying and selling. Additionally, Berkshire’s quarterly operating results indicate whether the team is acting as net buyers or sellers in the market.

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Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

The annual shareholder letter from the Oracle of Omaha provides profound insights. These letters outline Berkshire Hathaway’s performance and delve into the qualities Buffett seeks in investments.

Buffett’s Candid Market Outlook

Warren Buffett is primarily known for his optimistic outlook on investing. He often advises against betting against the U.S. economy, advocating that owning an S&P 500 index fund is one of the best approaches to gain exposure to leading American businesses.

Berkshire’s CEO embraces this perspective because he understands the cyclical nature of the economy and stock market. Economic downturns and market corrections are part of the cycle, and instead of trying to predict their timing, Buffett opts for a long-term investment strategy.

Historically, recessions and bear markets tend to be brief while economic expansions and bull markets extend over more prolonged periods. Thus, remaining optimistic about the long-term prospects is statistically more sensible.

Despite this optimism, Buffett is a discerning investor who seeks perceived value when acquiring stakes in public companies. In the “Where Your Money Is” section of his shareholder letter, he expressed his concern by stating, “Often, nothing looks compelling.” These four straightforward words reveal Buffett’s difficulty in finding value in a market that is historically high-priced.

A Shift in Investor Sentiment

Buffett’s sentiments are echoed by his actions. Over the past nine quarters, from October 1, 2022, to December 31, 2024, he has sold $173 billion in stocks. This includes a staggering $134 billion in sales during 2024, resulting in Berkshire’s cash holdings exceeding $334 billion, bolstered by U.S. Treasuries.

The current stock market exhibits some of the highest valuations in its history. The “Buffett Indicator,” which compares the market capitalization of U.S. companies to the nation’s GDP, reached a record high of 207.46% on February 18. Historically, the average reading for this indicator has been about 85% since 1970, indicating that the market is significantly overvalued.

S&P 500 Shiller CAPE Ratio data by YCharts.

Furthermore, the Shiller price-to-earnings (P/E) Ratio of the S&P 500, a metric based on ten years of average inflation-adjusted earnings, also indicates high valuations. As of February 24, the Shiller P/E Ratio stood at 37.73, marking its third-highest level in the history of continuous bull markets, with readings above 30 historically linked to substantial market pullbacks.

In addition to high market valuations, some of Berkshire Hathaway’s primary holdings have also underperformed in terms of perceived value. For instance, Apple (NASDAQ: AAPL) was initially added to Berkshire’s portfolio in 2016 when its P/E multiple was in the low teens. As of February 24, it trades at over 39 times its trailing twelve-month earnings, prompting Buffett to divest approximately 615.6 million shares over the past year.

Image source: Getty Images.

Patience Leads to Rewarding Outcomes

Given the high valuations of major stock indexes and Buffett’s ongoing status as a net seller, it seems unlikely that significant investments will be made from Berkshire Hathaway’s substantial cash reserves in the near future. Nonetheless, Buffett’s latest letter also conveyed assurances for long-term investors, emphasizing the foundational principles instilled by him and his late partner, Charlie Munger. He reassured shareholders by stating:

“Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities—mostly American equities although …