Warren Buffett's Warning to Investors Is Hard to Ignore

It's been a couple of great years for the U.S. stock market. From the end of 2022 through the end of 2024, the benchmark S&P 500 (SNPINDEX: ^GSPC) index soared by 53%.

Excitement about artificial intelligence and a full percentage point of interest rate cuts has been driving major market indexes to new heights. Historically, investing in the S&P 500 on days when it hits a new all-time high results in slightly above-average returns in the subsequent 12 months, according to research from JPMorgan Chase.

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Historical data aside, the S&P 500's big run-up over the past couple of years has left many stocks trading at sky-high valuations. America's most famous value investor, Warren Buffett, hasn't explicitly said he expects a market downturn ahead, but he's been acting that way. The holding company Buffett manages, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has been selling so much stock that it should probably make investors think twice before buying any exchange-traded funds that track the benchmark index.

Buffett's been selling stocks with both hands

Folks who who remember Buffett's famous quote, "Be fearful when others are greedy, and greedy when others are fearful," have noticed Buffett's been responding to a greedy stock market that keeps hitting new heights with equity sales. During the first nine months of 2024, the total value of stocks that Berkshire Hathaway owns dropped by 23% to $271.7 billion.

In the first nine months of 2025, Buffett sold over 605 million Apple shares. That was enough to reduce his stake in the device maker by more than two-thirds. Buffett also exited significant stakes in Snowflake, Paramount Global, and HP.

Lately, more sales than purchases have led investors to assume Buffett can't find any attractively priced stocks now that the current bull run is entering its third year. At recent prices, the average stock in the S&P 500 index is trading for 24.7 times trailing earnings. That is historically high, and it isn't the only indicator Buffett watches that suggests a bear market is around the corner.

Decades ago, Buffett referred to the ratio of U.S. stock market capitalization divided by the nation's gross domestic product (GDP) as "probably the best single measure of where valuations stand at any given moment." To this day, this ratio is known as the Buffett Indicator, and it's deep in the danger zone now.

The Buffett Indicator last topped out at around 195% at the beginning of 2022. By the end of 2022, the S&P 500 index was down by 20%, and it looks as if we're headed for another collapse. At recent prices, total market caps are worth more than 205% of the latest reported GDP figure.

Image source: The Motley Fool.

Ready to pounce

When Buffett acquired a controlling stake in Berkshire Hathaway in 1965, he paid about $14.86 per share. Today, the holding company's A-class shares are worth about $469,000 for an average annual gain of about 19.2% over the past 59 years.

If you want a Buffett-esque performance for your portfolio, you need to remember that the price you pay for a stock determines the return it provides. Buffett has a tendency to hoard cash during times of plenty and use it to his advantage during market downturns.

It appears that Buffett is ready to pounce during the next bear market. During the first nine months of 2024, Berkshire Hathaway's pile of cash and short-term Treasury Bills shot 96% higher. Now, the holding company is sitting on $320.3 billion that it can fire off at the next bargain opportunity that passes by.

While Buffett's been a net seller for over a year, he's still buying stocks. For example, Berkshire acquired new stakes in the insurance giant Chubb Limited, Domino's Pizza, and Pool Corp. during the first nine months of 2024.

Before you look at Buffett's overall stock sales in 2024 as a reason to avoid the market completely, it's important to realize he's running a $1 trillion company and not your personal retirement account. If a particular stock looks like a bargain to you now, don't let overall market valuations stop you from buying it.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Domino's Pizza, and JPMorgan Chase. The Motley Fool has a disclosure policy.