Over the last three weeks, Wall Street has sent investors a wake-up call to remind them that stocks do, in fact, move in both directions. Following a nearly 2.5-year bull market rally, the iconic Dow Jones Industrial Average, benchmark S&P 500(SNPINDEX: ^GSPC), and growth stock-propelled Nasdaq Composite(NASDAQINDEX: ^IXIC) find themselves 8%, 9.3%, and 13.6% below their respective all-time closing highs, as of March 11.
Among Wall Street’s numerous money managers, perhaps none is least surprised by this move lower in equities than Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) billionaire CEO Warren Buffett. Although the aptly named “Oracle of Omaha” is an unwavering long-term optimist when it comes to the U.S. economy and stock market, his $173 billion warning to Wall Street over the last two years has been an ominous signal that trouble was brewing.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
To reiterate, Berkshire Hathaway’s chief has opined, on multiple occasions, that investors shouldn’t bet against America. Even though Buffett and his top investment advisors (Todd Combs and Ted Weschler) realize that economic downturns and stock market corrections are inevitable, they also recognize that periods of economic expansion and bull markets last substantially longer than downturns.
Nevertheless, Warren Buffett’s trading activity over short periods doesn’t always align with his long-term investment philosophy.
While quarterly filed Form 13Fs with the Securities and Exchange Commission allow investors to see which stocks Buffett and his team have been buying and selling, Berkshire Hathaway’s quarterly cash flow statement provides precise insight on how much in net equities the Oracle of Omaha has purchased or sold.
Over the previous nine quarters, Buffett has been a persistent net seller of stocks:
Altogether, Berkshire’s leader has overseen the sale of roughly $173 billion more in stocks than he’s purchased since Oct. 1, 2022 — and there’s pretty clear reasoning behind this net-selling activity.
In Warren Buffett’s latest annual letter to shareholders, he offered one of the more direct (and chilling) assessments of how he views stocks on Wall Street. Put bluntly, the Oracle of Omaha noted, “often, nothing looks compelling.”
One of the very few traits Buffett is unwavering on is his value-investing roots. Even though value is a subjective term that varies from one investor to the next, Berkshire’s CEO refuses to buy shares of a company — even one deemed to be a wonderful business — if he doesn’t feel like he’s getting a good deal. With the stock market being historically pricey, it’s become increasingly harder to find a bargain.
The market-cap-to-GDP ratio, which has become known as the “Buffett Indicator,” has long been a favorite valuation measure of Buffett’s. It’s arrived at by dividing the cumulative market cap of all U.S. stocks by U.S. gross domestic product (GDP).
When back-tested to 1970, the Buffett Indicator has averaged a reading of 85%. Put another way, the total value of publicly traded stocks equates to roughly 85% of U.S. GDP. In February 2025, the Buffett Indicator surpassed 207%, which is an all-time high.
It’s a similar story with the S&P 500’s Shiller price-to-earnings (P/E) Ratio, which is occasionally referred to as the cyclically adjusted P/E Ratio (CAPE Ratio). The Shiller P/E is based on average inflation-adjusted earnings over the previous 10 years.
When back-tested all the way to January 1871, the S&P 500’s Shiller P/E has averaged a modest multiple of 17.22. But as of the closing bell on March 11, the Shiller P/E stood at 34.76. While this is below its peak of 38.89 during the current bull market cycle, it’s still more than double its long-term average.
The five prior instances where the Shiller P/E topped 30 were all eventually followed by declines in the benchmark S&P 500 of at least 20%.
In other words, when the stock market becomes pricey, Warren Buffett has no qualms about paring down his investment portfolio and sitting on his proverbial hands until valuations become attractive.
Image source: Getty Images.
Warren Buffett’s persistent selling activity intimates that he’s been expecting a sizable pullback in equities for some time. Based solely on historic precedent, there’s the possibility investors could witness the S&P 500 and Nasdaq Composite fall by around 40%.
While elevator-like moves lower in Wall Street’s major stock indexes tend to tug on investors’ heartstrings, they’re just the type of event Berkshire’s CEO waits for to begin deploying his company’s capital. Berkshire Hathaway closed out 2024 with a record $334.2 billion in cash, cash equivalents, and marketable securities.
History has shown that being patient and pouncing on price dislocations works exceptionally well for the Oracle of Omaha.
One of Warren Buffett’s best all-time investments was purchasing $5 billion worth of Bank of America(NYSE: BAC) preferred stock in August 2011. While Bank of America wasn’t exactly looking for a handout at the time, Buffett swooped in with cash to shore up its balance sheet following the Great Recession.
The real win was the BofA stock warrants that also came with the capital infusion. In mid-2017, Berkshire Hathaway exercised these warrants for just $7.14 per share and acquired 700 million shares of BofA common stock. At the time, it resulted in an instant $12 billion unrealized gain.
Waiting for panic and peril to create price dislocations and bring wonderful businesses down to fair prices has frequently led to long-term promise for Warren Buffett and Berkshire Hathaway’s shareholders. This time will be no different.
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Bank of America is an advertising partner of Motley Fool Money. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
