The Stock Market Is Historically Pricey: You Can Trust This Warren Buffett Stock to Deliver

The stock market is historically expensive. At least, that's what major valuation metrics are telling us. The price-to-earnings ratio for the S&P 500 right now, for example, is above 31. That's significantly higher than its long-term average of around 16. For comparison, this major U.S. stock market traded at just 14 times earnings in 2011.

Want a good sign that markets are getting expensive? Look at Warren Buffett's actions. His holding company, Berkshire Hathaway, now has a cash hoard of nearly $350 billion -- roughly one-third of its entire market cap! But Buffett isn't getting out of the market entirely. In fact, he bought more than $500 million of a well-known business last quarter, a business that is now his fifth-biggest holding.

If you're worried about markets being too expensive, this Warren Buffett stock could be your answer.

This looks like Warren Buffett's favorite stock right now

Warren Buffett isn't buying many stocks right now. That's a big reason why his company's cash pile continues to grow quarter after quarter to record amounts. Last quarter, however, he did buy 3,454,258 shares of a company he has owned since 2020: Chevron (NYSE: CVX). Chevron is hardly the trendiest name on the market today. But that could be exactly the reason Buffett is buying.

Right now, Chevron stock trades at 19.7 times earnings -- a sizable discount to the market overall. Yet profits continue to grow. On a forward basis -- that is, based on what analysts believe the company will earn over the next 12 months -- shares trade at just 16.2 times earnings. Few companies that are growing this quickly have such a low valuation. Throw in Chevron's 4.5% dividend yield, and shares start to look like the perfect combination of value, growth, and income.

Why is Chevron stock so cheap? The most obvious culprit is low oil prices. In 2022, oil prices approached $120 per barrel. Today, they're below $60 per barrel, and the outlook is fairly grim. Oil inventories and supply continue to rise, a reality that is expected to continue into 2026. "At this rate, global oil supply is on track to rise by 3 mb/d on average in 2025 and a further 2.4 mb/d in 2026," warns a report from the IEA.

Yet Buffett keeps buying more Chevron shares. Why? Because he's not just looking at the next 12 months. Long term, Chevron has enviable competitive advantages, such as its ability to deploy capital efficiently at scale. But perhaps Chevron's greatest advantage right now is its ability to protect investors in the event of a market correction.

Image source: Getty Images.

Chevron can protect your portfolio in times of trouble

As a major oil stock, Chevron isn't immune to market corrections. But it can help shoulder the blow of a market correction should one occur. That's due to a few reasons.

First, Chevron shares are already historically cheap, while the market overall is heading higher due to growth in high-valuation stocks like Nvidia. If high-growth stocks experience a correction, more traditional value stocks like Chevron may suffer less, since their valuations started from a lower base. Additionally, a future market correction could come as a result of rising geopolitical tensions. In this case, the price of oil could actually rise, benefiting producers like Chevron.

Finally, don't rule out the effect of Buffett and his massive cash hoard. Buffett already owns nearly 8% of Chevron. He could boost this stake significantly if shares decline in value. Buffett has already proven his willingness to buy more than a quarter of the outstanding shares of an oil business through his stake in Occidental Petroleum. It's nice to know that if Chevron faces share price weakness, there's a deep-pocketed buyer likely willing to step in.

With stock markets at all-time highs, Chevron remains one of Buffett's top stock picks. That should remain true even if markets experience a near-term setback.

Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chevron, and Nvidia. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.