The S&P 500 is closing out 2024 with a remarkable 27% gain, putting the index on track for one of its best years in recent memory. Fueled by excitement around artificial intelligence and interest rate cuts, it has surpassed more than four dozen record highs this year. Yet as investors celebrate, Warren Buffett, one of the world’s most successful investors, has sent a $150 billion warning that could give some pause.
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The S&P 500: Highs and Valuation Concerns
Historically, markets tend to perform well after reaching new highs. From January 1970 to December 2023, the S&P 500 delivered an average 9.4% return in the 12 months following record closes. By comparison, its average annual return over the same period was slightly lower at 9%.
However, the incredible run-up this year has left many stocks trading at historically high valuations. According to FactSet, the S&P 500 currently trades at 22 times forward earnings, well above its five-year average of 19.6 times. High valuations often lead to muted long-term returns. Torsten Slok, Chief Economist at Apollo Global Management, estimates the current multiple implies an annual return of just 3% over the next three years.
It’s in this context that Warren Buffett’s recent moves stand out.
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Buffett’s $150 Billion Sell-Off
Under Buffett’s leadership, Berkshire Hathaway has generated annualized returns of 20% since the 1960s, far outpacing the S&P 500. This success was built on smart investments in companies like Coca-Cola and American Express, purchased when they were undervalued.
But recently, Berkshire Hathaway has shifted strategies. Over the last seven quarters, the company has been a net seller of stocks, offloading more than $150 billion worth. This pattern suggests that Buffett and his team are struggling to find reasonably priced investment opportunities in today’s market.
Berkshire’s size complicates its ability to deploy capital effectively. With a market cap of $1 trillion, small-cap stocks are unlikely to make a meaningful impact. Additionally, Buffett has traditionally avoided technology stocks, a sector driving much of the S&P 500’s gains, because he finds it difficult to evaluate.
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Buffett acknowledged these challenges in his latest shareholder letter: “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others.”
What Buffett’s Warning Means for Retail Investors
While Buffett’s actions highlight the challenges of today’s high valuations, they don’t necessarily spell doom for individual investors. Unlike Berkshire, retail investors can capitalize on a broader array of opportunities, including smaller companies and technology stocks.
Buffett’s $150 billion sell-off should be seen as a call for caution, not an outright signal to avoid the market. Valuations matter, and the current environment may warrant a more selective approach. The S&P 500’s lofty levels mean even small economic or political disruptions could trigger a correction or bear market.
A Balanced Approach to Investing
Investors shouldn’t let Buffett’s moves scare them into completely avoiding the stock market. As legendary investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Rather than timing the market, investors can focus on building a balanced portfolio. Diversification across sectors and asset classes, combined with a long-term perspective, can help mitigate risk while still capturing potential growth.
The Big Picture
The S&P 500’s record-breaking year is a testament to the market’s resilience and the optimism surrounding new technologies like AI. But Buffett’s actions underscore the importance of evaluating the risks associated with historically high valuations.
For individual investors, this moment presents an opportunity to reassess portfolios, prioritize quality, and maintain a disciplined approach. While the road ahead may include bumps, staying invested and focused on long-term goals remains the best strategy for navigating today’s market.
In the end, Buffett’s warning isn’t about doom—it’s a reminder to invest wisely and remember that fundamentals always prevail in the long run.
