Warren Buffett Just Shared a 10-Word Warning With Investors. Here's What History Says Happens Next.

The stock market has pushed the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) to new heights in 2026. Most investors are optimistic about the future, too, with analysts expecting the indexes to keep climbing higher, producing strong earnings growth for years to come.

But not every investor is convinced stocks are cheap right now. Warren Buffett just issued a warning to investors, suggesting there's not much good value to be had in today's market. And history suggests a big move in stocks could be coming next.

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Buffett's 10-word warning to investors

At his core, Buffett is a value investor. His investments are rooted in the fundamental analysis of a company's ability to produce high returns on capital. If the market offers a discount on a company's equity value, it's easy to find companies capable of delivering strong returns. But that's gotten quite difficult lately.

"It's tough to find values when everybody is preferring gambling," Buffett said in a recent interview. Those 10 words fully summarize Buffett's opinion of the market right now and should stand as a warning to investors.

Investors are "gambling" more with their portfolios today than perhaps at any point in the past. Margin debt balances reached $1.5 trillion last month. That's a record level and up 49% year over year.

In another interview earlier this year, Buffett pointed to the proliferation of 0DTE (zero-day-to-expiration) options as another indicator of the market's current attitude. "That's not investing, it's not speculating, it's gambling," he said. 0DTE option volume is up 46.2% through the first half of 2026, with participants trading over 20 million contracts a day. S&P 500 0DTE options have more than tripled since the start of 2024.

Investors also have access to leveraged ETFs, which provide 2x or 3x returns on an index or an individual stock. These ETFs are commonly used for short-term bets or hedges on the direction of the underlying security or index. While they amplify the upside potential, they also carry significant downside risk. Leveraged ETFs account for 1% of total assets across all U.S. exchange-traded funds, but they now account for 40% of trading volume.

All this activity is facilitated by brokers and exchanges, which earn more when trading volume increases. Cboe expects additional single-stock symbols to list short-dated options in the third quarter. Fund companies are creating new leveraged ETFs every week for stocks with the most momentum. In the meantime, the growing activity is pushing market valuations higher.

Here's what history says happens next

As prices continue to climb higher, valuations are looking more stretched, no matter what angle you take.

Buffett's preferred measure of market valuations is the ratio of the total market cap of all equities to U.S. GDP. In a 2001 article, he noted the ratio topped 200% in 1999 and part of 2000. The ratio of all corporate equities to U.S. GDP exceeded 335% at the end of 2026's first quarter.

While there are reasons for equity values to remain elevated relative to GDP, the discrepancy has grown considerably since 2019, and 300% could be the new 200%. The last time equity values exceeded 300% of GDP was late 2020, a year before the start of the 2022 bear market. Equity values breached 300% of GDP again in mid-2024, so the market could be headed for another pullback.

Another strong indicator of long-term forward returns is the CAPE ratio. The cyclically adjusted P/E ratio uses the last 10 years of earnings adjusted for inflation to assess the current market valuation. As of this writing, the CAPE ratio was 40.4. There's only been one other period in history when the CAPE ratio exceeded 40: the height of the dot-com bubble. Again, history is not on the side of the market's current valuation.

If a price pullback occurs, current investor behavior could exacerbate the decline. Highly leveraged investors or those buying 0DTE options may lose a significant amount of capital. A decline could trigger a margin call for those with excessive margin debt, forcing additional selling and further depressing prices.

Patient investors waiting for value in the market could once again find themselves flush with opportunities. However, try to avoid the lure of gambling while brokers, exchanges, and fund managers all offer more and more gambling-like products.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets. The Motley Fool has a disclosure policy.