Warren Buffett Sends Wall Street a Grim $127 Billion Warning: History Says the Stock Market Will Do This in 2025.

Warren Buffett is considered one of the greatest investors in American history. Under his leadership, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shares have returned approximately 5,500,000% since the mid-1960s, compounding at 20% annually. Comparatively, the benchmark S&P 500 (SNPINDEX: ^GSPC) has returned about 10.4% annually during the same period.

Much of that success can be attributed to prudent acquisitions and stock purchases made by Buffett, though his fellow investment managers Ted Weschler and Todd Combs have certainly contributed. Importantly, their recent capital allocation decisions send a grim warning to Wall Street. Berkshire sold $133 billion in stock during the first three quarters of 2024, while purchasing only $6 billion in stock.

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That means the company was a net seller of stocks to the tune of $127 billion through the first nine months of last year. Berkshire has never sold stocks so aggressively. But the warning is particularly ominous because the company also had a record $325 billion in cash and short-term investments on its balance sheet when the third quarter ended. In other words, Buffett and his fellow investment managers certainly had the means to make big purchases, but still chose not to.

Read on to learn more.

Image source: Getty Images.

History says the S&P 500 will deliver a below-average return in 2025

Since 2010, Warren Buffett's Berkshire Hathaway has been a net seller of stocks -- meaning the value of the stocks that it sold exceeded the value of stocks that it purchased -- during seven years (excluding 2024). The chart below lists those years, and it shows how the S&P 500 performed in the subsequent year.

Data source: YCharts. Chart by Author.

As shown above, the S&P 500 has returned an average of 11% during the 12-month period following years in which Berkshire was a net seller of stocks. Comparatively, the index has returned 13% annually since 2010.

Here is the big picture: The S&P 500 has typically generated below-average returns (by 2 percentage points) during the 12-month period following years in which Berkshire was a net seller of stocks. That means Warren Buffett has generally leaned away from stocks ahead of weaker years. In that context, Berkshire selling a historic amount of stock during the first nine months of 2024 hints at a below-average return in 2025.

Warren Buffett's warning aligns with another stock market alarm

Warren Buffett's historic $127 billion warning to Wall Street happens to align with another stock market alarm. Specifically, the S&P 500 currently trades at a historically expensive valuation. The index achieved a cyclically adjusted price-to-earnings ratio (CAPE) of 37.9 in December 2024, which is a substantial premium to 20-year average of 27.

In fact, since the S&P 500 was created in March 1957 (815 months ago), there have been only 52 months in which the index had a monthly CAPE ratio above 35. Put differently, the S&P 500 has been less expensive than it is today 94% of the time during the last seven decades.

Unfortunately, monthly CAPE ratios above 35 have generally correlated with negative returns during the next one year and three years, as shown in the chart below.

Data source: YCharts. Chart by Author.

As shown above, when the S&P 500's monthly CAPE ratio has exceeded 35, the index has declined by an average of 1% during the next year and it has declined by an average of 8% during the next three years.

Here is the big picture: Berkshire was a net seller of stocks through the first three quarters of 2024, and the S&P 500 currently trades at a historically expensive valuation. Both signals suggest the stock market will deliver a below-average return in 2025, and the latter signals hints at the possibility of a negative return.

For that reason, investors should be cautious in the current market environment. That means paying close attention to valuations when buying stocks. Additionally, now is a good time to build an above-average cash position. Doing so will make it easier to capitalize on the next drawdown.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.