Berkshire Hathaway, led by Warren Buffett, divested $133 billion in stocks throughout the initial three quarters of 2024 while making only $6 billion in new purchases. This strategic shift positioned the company as a net seller with a staggering total of $127 billion, marking an extraordinary departure for Berkshire. The concern is heightened by the fact that by the end of the third quarter, the firm possessed an unprecedented $325 billion in cash and short-term assets, reflecting their capacity to engage in significant acquisitions, yet they opted against it.
From 2010 onward, in years when Berkshire Hathaway was a net seller of stocks, the S&P 500 has recorded an average return of 11% in the subsequent 12 months, contrasting with its annual average return of 13% since 2010. This data implies that the S&P 500 usually experiences below-average returns the year following Berkshire’s net stock sell-offs. Considering Berkshire’s recent large-scale selloff, this pattern may indicate diminished returns for 2025.
Expect Below-average Returns for the S&P 500
The significant divestment by Buffett coincides with another pressing concern regarding the stock market: the elevated valuation of the S&P 500. In December 2024, the index recorded a Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 37.9, which is considerably above its 20-year average of 27.
Historically, when the S&P 500’s monthly CAPE ratio surpassed 35, the index exhibited an average decline of 1% over the ensuing year and a decline of 8% on average over the following three years. Given these indicators, investors are encouraged to exercise caution in the current market landscape. It is essential to remain mindful of valuations while investing in stocks.
Moreover, now could be an opportune moment to amass an above-average cash reserve, facilitating potential advantages during the next market pullback. Investors should strongly consider Warren Buffett’s cautionary message and stay alert to market dynamics in the upcoming year.
