Warren Buffett's Warning to Wall Street Reached Deafening Levels Last Year, but There's Now a Silver Lining.

With the stock market hitting all-time highs on many occasions last year, investors have debated for months whether it is overvalued. Some believe the artificial intelligence (AI) trend is powerful enough to cast valuations aside and propel the market higher because AI could be just as disruptive as the advent of the internet, if not more so.

Meanwhile, others say there's still a lot of uncertainty in the value of AI technology, and valuations have gotten ahead of themselves. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett, one of the greatest investors ever, seemed to grow concerned about market fundamentals last year, and his company's actions sent a deafening warning across Wall Street.

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But Buffett and Berkshire recently made moves that suggest there could be a silver lining to the Oracle of Omaha's bearish stance over the past year.

Buffett's warning

In 2024, Buffett and his team stockpiled more cash than ever before. At the end of the third quarter, Berkshire had over $320 billion in cash and cash equivalents and short-term U.S. Treasury bills.

Furthermore, Berkshire sold way more stock than it bought, including big sales of its two largest positions: Apple and Bank of America. Through the first nine months of 2024, Berkshire only purchased $5.8 billion in equity securities while selling $133.2 billion. It also bought back only a few billion dollars of its own stock, a significant reduction from its repurchase activity in previous years.

If those weren't clear enough signs that the team at Berkshire thought the market was overvalued, another major indicator was also flashing red. Buffett looks at the ratio of stock market capitalization to gross domestic product (GDP) to see if the stock market is undervalued or overvalued. Historically, a ratio of 50% suggests the market is undervalued, while a ratio over 100% suggests the market is overvalued. This figure recently surpassed 200%.

Buffett and Berkshire have a strong track record of reading the market and getting out (and in) at the right time. It's one of the reasons he has generated such extraordinary gains over the decades. Given all these factors, the company's actions last year should have set off alarm bells for many investors.

The silver lining

Those warning signs still hold today. However, there does appear to be a silver lining: Berkshire has recently been buying stocks again. Since mid-December, it has poured $563 million into several companies: Occidental Petroleum, Sirius XM Holdings, and VeriSign.

Even though these were additions to existing positions, the buying activity suggests Buffett and his team still see opportunities in the current market. Market breadth was poor last year as a few dozen high-flying tech and artificial intelligence stocks carried the market.

In 2024, 174 stocks in the S&P 500 ended the year in the red. Meanwhile, 348 stocks in the S&P 500 underperformed the benchmark's 23% gain. In that context, there should still be good companies available at reasonable valuations.

Data by YCharts.

All of Berkshire's recent purchases vastly underperformed the index last year, and all have forward price-to-earnings ratios (P/E) under 25, with domain-name registry VeriSign trading at roughly 24 times forward earnings, Occidental at less than 14, and Sirius around 7.

Recent underperformance and low P/E multiples aren't necessarily flashing signs to buy. But in this overvalued market, Buffett sees an opportunity in those stocks. And that's a reminder to investors that there are always opportunities, especially with value stocks that may be more insulated to any market sell-off since investors already have low expectations. Just make sure to do your due diligence.

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Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has positions in Bank of America. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and VeriSign. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.