Warren Buffett and Berkshire Hathaway have sent a strong signal to Wall Street. The company sold $127 billion in stocks during the first three quarters of 2024, marking its most aggressive selling ever.
Despite holding a record $325 billion in cash, Berkshire made only $6 billion in stock purchases. This suggests Buffett and his team see risks in the current market.
What History Says About Buffett’s Stock Sales
Since 2010, Berkshire has been a net seller of stocks seven times. On average, the S&P 500 returned 11% in the year following those sales—lower than the 13% average annual return since 2010. This historical trend suggests below-average returns in 2025.
Here’s how the S&P 500 performed in years following Berkshire’s stock sales:
- 2010: 0%
- 2012: 30%
- 2014: -1%
- 2016: 19%
- 2020: 27%
- 2021: -19%
- 2023: 23%
The data shows that Buffett’s selling often precedes weaker market years.
The S&P 500 Is Expensive
The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio reached 37.9 in December 2024. This is far above the 20-year average of 27.
Historically, when the CAPE ratio exceeds 35, the S&P 500 has delivered negative returns:
- 1-Year Average Return: -1%
- 3-Year Average Return: -8%
The high valuation suggests the market may struggle in 2025 and beyond.
What Should Investors Do?
Buffett’s actions and the market’s high valuation point to potential risks. Here’s how investors can prepare:
- Be Cautious: Avoid overpaying for stocks. Focus on companies with solid fundamentals and reasonable prices.
- Hold Cash: Building a cash reserve can help you buy stocks at lower prices during a downturn.
- Think Long-Term: Short-term volatility is likely, but a disciplined approach will pay off over time.
Buffett’s moves serve as a reminder to stay vigilant. With the market at historically high valuations, 2025 could be a challenging year for investors.
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