S&P 500 Reaches Record Valuations Amid Investor Caution

The S&P 500 has seen impressive gains over the past two years, as investors have flocked to growth stocks, betting on their ability to flourish in a low-interest-rate environment. Growth companies typically excel when borrowing is cheap, allowing them to develop and expand. A robust economic backdrop also means consumers have more disposable income to spend on these companies’ products and services.

In a bull market, there are solid reasons to consider buying and holding growth stocks. However, these remarkable gains have brought about higher valuations that may raise concerns for potential investors.

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Stock prices have surged, leading to record-high valuations compared to just a few years ago. This steep climb raises questions about the wisdom of new stock purchases today. To gain insight, we will consider the approach of renowned market expert Warren Buffett and his current investment strategies.

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Buffett’s Long-Term Value Investing Philosophy

Warren Buffett’s investment philosophy appeals to many due to his impressive historical performance in the market. As chairman of Berkshire Hathaway, he has achieved a compounded annual growth rate of nearly 20% over 59 years, significantly outpacing the S&P 500’s 10% return. His success stems from a disciplined strategy of investing in industries he understands, holding positions for the long term, and entering the market at reasonable prices.

Buffett is widely recognized as a value investor, which means he seeks to buy stocks when they are trading below their intrinsic values. The expectation is that eventually, the market will acknowledge these companies’ strengths, leading to price increases that benefit early investors.

Currently, the S&P 500 has increased in value, even through the beginning of this year, although it has seen declines since mid-February. Investor sentiment is shaky due to uncertainties around consumer spending and the effects of President Trump’s tariffs on imports from countries such as China and Mexico.

The Current Expensive Market Landscape

As stock prices rise, so do valuations. An important metric to note is the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio. This ratio averages stock prices and earnings over a 10-year period to account for economic cycles. Today, the ratio has reached levels above 37, a benchmark surpassed only two other times since the S&P 500 was established as a 500-company index in the late 1950s, indicating that stocks may be considerably overpriced.

S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.

Examining Buffett’s recent activity reveals that he has not been buying stocks but instead has sold off significant portions of his holdings. In total, his net sales for the past year reached $134 billion, including reductions in his stakes in major companies like Apple and Bank of America, where he lowered his positions by 67% and 34%, respectively.

These actions have contributed to Berkshire Hathaway’s record cash reserves exceeding $334 billion. In his recent letter to shareholders, Buffett noted, “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.”

Buffett’s current stance suggests that he did not see attractive opportunities last year, and given his engagement with value investments, he clearly has not rushed into buying stocks at today’s inflated prices.

Investing Lessons from Buffett

Should investors avoid purchasing stocks right now simply because Buffett has been cautious? Not necessarily. While Buffett may not be spotting a wealth of opportunities, he continues to actively monitor the market and make selective purchases. Notably, in the fourth quarter, he entered a new position in Constellation Brands (NYSE: STZ) and boosted his investment in Domino’s Pizza (NASDAQ: DPZ) by over 86%. Both companies are currently priced more attractively concerning their forward earnings estimates than they were a year earlier.

STZ PE Ratio (Forward) data by YCharts. PE Ratio = price-to-earnings ratio.

This indicates that even in a costly market, solid investment opportunities still exist. While, like Buffett, you may not find yourself snatching up stocks at a rapid pace due to high valuations, it is important not to retreat from investing altogether. Avoiding the market could mean missing potential wealth-building investments.

Buffett emphasizes that maintaining stock investments is essential. He stated in his recent letter to shareholders, “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.”

In varying market conditions, Buffett’s approach of seeking stocks to buy and hold has proven successful over time. This principle could help guide other investors toward long-term success as well.

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*Stock Advisor returns as of February 28, 2025

Bank of America is an advertising partner of Motley Fool Money. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Domino’s Pizza. The Motley Fool recommends Constellation Brands. 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.