Warren Buffett Just Did This for the Third Quarter in a Row, and It's a Big Warning Sign for the Stock Market

Warren Buffett is the undisputed greatest investor of all time, and his success at Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the conglomerate he has run for almost 60 years, has made thousands of investors rich alongside him.

It's no surprise that investors watch Buffett's every move for insight into the market, and it helps that the Oracle of Omaha has been happy to dole out advice during his long career of market-crushing returns.

So it was noteworthy in Berkshire's 13F filing -- which was released last Thursday and shows the company's stock purchases and sales -- that Buffett's bearish view of the stock market continued. The company's portfolio shrank for the third quarter in a row as it dumped equities amidst a roaring bull market.

Image source: The Motley Fool.

Berkshire's portfolio fell from $280 billion to $266 billion in the quarter, and it's down from $352 billion at the end of 2023. Not only that, but the company also didn't repurchase its own stock for the first quarter in six years.

Together, those two signals seem to indicate that Buffett could be preparing for a possible sell-off in the market as stock valuations are especially frothy. The S&P 500 trades at a price-to-earnings ratio of 30, and the CAPE ratio, a measure of valuation based on earnings over the last 10 years, is near an all-time high. Altogether, Berkshire sold seven stocks and bought three in the quarter.

It sold:

• 100,000 shares of Apple
• 235,168,699 shares of Bank of America
• 719,052 shares of Capital One
• 20,679,787 shares of Nu Holdings
• 1,007,062 shares of Charter Communications
• 665,903 shares of Ulta Beauty
• 3,977,870 shares of Floor & Decor

It bought:

• 1,277,256 shares of Domino's Pizza
• 5,445 shares of Heico
• 404,057 shares of Pool Corp.

Why Berkshire keeps selling stocks

Apple is still Berkshire's biggest holding, but Buffett's conglomerate has been selling the stock since the fourth quarter of 2023. During that time, it has reduced its holdings from 915.6 million shares to just 300 million in the third quarter, and those sales have generated roughly $120 billion in cash.

When asked about the stock sales, Buffett said he continued to think that Apple was a wonderful business, but he was hedging over rumors in Washington that the capital gains or corporate tax rate could go up. At Berkshire's annual shareholder meeting, he also said higher taxes are likely due to the growing national debt. With President-elect Donald Trump set to move into the White House, a tax hike seems less likely now, but the comments about the national debt are valid.

Buffett hasn't explicitly said that stocks are overvalued, but he has complained that there aren't any attractively priced targets for the company to acquire. While Berkshire has been selling stocks, it's been rotating that cash into Treasury bills, a safe haven if the stock market pulls back.

What it all means for investors

It's nearly impossible to predict short-term movements in the stock market, and while stocks are expensive according to traditional metrics, the overall economy looks strong with a low unemployment rate, inflation now under control, and the Fed cutting interest rates to encourage economic growth.

There are also valid reasons stock valuations have inflated, including the artificial intelligence boom, which has added trillions in value to the stock market, including making Nvidia the most valuable company in the world. Investors seem to be bullish on the Trump administration as they expect more tax cuts and deregulation, and falling interest rates are typically bullish for stocks.

Still, Buffett's signals are unmistakable. The Berkshire chief can't predict a stock market crash, but he knows when stocks look too expensive. Before you get caught up in the market euphoria, it's worth taking his viewpoint into account.

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Bank of America is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Domino's Pizza, Nvidia, and Ulta Beauty. The Motley Fool recommends Heico and Nu Holdings. The Motley Fool has a disclosure policy.